Have we fallen out of love with private sector contractors?

Is the collapse of Carillion a watershed moment? Robert Peston thinks so:

Carillion’s collapse marks the end of a 25-year love affair between Tory and New Labour governments on the one hand and private-sector service providers on the other.

Could this be the point at which political opinion turns against the private sector provision of public services? And, if so, is it simply catching up with where the voters have been for some time?

In the mid-1990s, I went to see Tony Blair speak at Brenford Fountain Leisure Centre. The first question from the floor was about renationalising the railways and utilities. Labour’s new leader dismissed the idea, essentially saying that it was never going to happen and that there were far more important things on which a new Labour government would need to focus its energy and resources.With that the conversation moved on.

And that was pretty much how things went for the next two decades. In his dismissal of denationalisation, Tony Blair was simply reflecting the prevailing political orthodoxy which arose during the Thatcher years. The government was to do less and the private sector was to do more. That was the way the world was going. Light-touch regulation and the privatisation of public services would be the order of the day whoever was in power.

Recent years, though, there seem to be signs that the voters are not altogether happy with this state of affairs. The Guardian’s Andy Beckett declared last summer that Britain had fallen out of love with the free market. Here he quotes IEA director Mark Littlewood:

Amid all the current political turmoil in Britain and the wider world, the shift against free markets has yet to register fully with much of the media or many voters. But the most ardent neoliberals have noticed. “Free marketeers have been gobsmacked,” says Mark Littlewood, director of the Institute of Economic Affairs, which has supplied British politicians with pro-capitalist arguments for 62 years. “Things we thought of as like the laws of gravity are now up for grabs.”

Equally gobsmacked was the Legatum Institute. “The capitalism ‘brand’ is in crisis,” it said after its joint research with Populus found significant support for stronger business regulation and the re-nationalisation of utilities and railway companies. Nor can this be dismissed as the idealism of young people who can’t remember how bad things were in the 1970s. These views are fairly evenly spread. (The full list is on pages 15-18 of the report.)

These views also cross the traditional left-right divide. A YouGov survey found that the proportion of UKIP voters supporting re-nationalisation was around 75 percent. There was even a narrow majority among Tory voters.

There is also evidence to suggest that voters have a negative view of big business. Research by the Edelman Trust and IpsosMORI reported low levels of trust in large corporations and the people who run them. However, this “unprecedented crisis of trust” seems to apply across western economies and to most institutions and authority figures. According to Edelman’s recent figures, business hasn’t fared much worse than anyone else.

Ipsos MORI data records a sharp fall in the proportion of people who think company profits make things better for their customers but this decline goes back to the 1980s and has held fairly steady ever since.

Chart by Ipsos MORI Reputation Centre

YouGov data also shows the level of trust in people who run large companies to be consistently low (around 20-25 percent) since 2003. Contrast that with journalists whose reputation has collapsed over the past 15 years.

There are a couple of questions on the British Social Attitudes survey which go back to the 1980s and enable us to track broad anti-corporatist sentiments. (Thanks to Harry Carr at Sky News for these charts.)

This suggests that a majority of people have a negative view of corporate behaviour and have done for some time. With some fluctuations, these numbers have held fairly steady since the 1980s.

The 2015 British Social Attitudes survey found similar levels of anti-big business feeling among UKIP and Labour voters.

The BSA also has some data on attitudes to nationalisation although, for some reason, it stopped asking the question in 2009.

This shows a balance of opinion in favour of state ownership but nowhere near as high as that found in the more recent surveys.

This data leads to three tentative conclusions:

  1. People in the UK have had a negative view of big corporations and those that run them for some time. This goes back to the 1980s and the financial crisis and recent corporate scandals don’t seem to have changed it either way.
  2. People were never that keen on privatisation. They may have bought shares in privatised companies but that didn’t mean they thought it was good idea in principle.
  3. There seems (going by the gap between the BSA and the more recent YouGov and Legatum findings) to have been a rise in support for re-nationalisation in the last five years or so.

Which raises a broader question, is this a shift in public opinion about private sector public service provision or does it reflect a deeper and more long-term anti-corporate sentiment that has only recently found its political expression? Is the collapse of Carillion really a pivotal event or has it just come at a time when political opposition to privatisation was finding its voice? Was it the last straw it did it just confirm the beliefs of many voters that a lot of things shouldn’t have been privatised in the fist place?

Whatever happens next it is likely that governments will find a lot more public attention on the private provision of public services. Further privatisations will almost certainly meet stiff resistance, as the plans to privatise the Land Registry and Ordnance Survey already have. My guess is that this would probably have happened anyway regardless of whether or not Carilllion had crashed. Where I think Robert Peston is probably right is that private sector service provision has peaked. Whatever the rights and wrongs of privatisation, governments will be faced with a lot more public hostility to it than they have seen for the past few decades.

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Breaking the Overton Window

An FT editorial declared last year that divisions between left and right no longer explain how voters think. In September Intelligence Squared ran a debate on Britain’s Political Identity Crisis and the dissolving of left and right into new political tribes. There is much talk of realignment in British politics.

One of the most useful contributions to the debate was this chart published just before Christmas by the FT’s John Burn-Murdoch and Sebastian Payne, based on data from the British Election Survey. It plots voters on two axes according to their attitudes. The horizontal axis is the traditional left-right split, based on issues like income distribution, taxation and the behaviour of big business. The vertical axis maps social attitudes to things like the death penalty, crime, school discipline and traditional British values.

As you might expect, it shows a large number of voters following something like the traditional two-party positions; for the Conservative voters, right-wing on economic issues and socially conservative on cultural issues, for Labour voters, the opposite. However there is also a significant chunk in the top left hand corner, containing both Labour and Conservative voters who are left-wing on economic issues yet more conservative on cultural questions.

 

Jon Mellon and Chris Prosser from the BES team discussed this in a paper they published last September. They found that, unlike the voters, most parliamentary candidates from the major parties fitted into the classic party positions. Plotted on a similar scale, their stated positions showed the Labour candidates falling into the bottom left quadrant, economically left and socially liberal, while the Conservative candidates clustered towards the top left quadrant, economically right and socially conservative.

There is, then, a group of voters in the top left quadrant not really represented by anyone. Furthermore, as Mellon and Prosser note, these voters are predominantly working class.

Something else happened in over the last thirty years though. The Overton Window, that range of policies that politicians and commentators deem to be politically acceptable, moved towards the bottom right. It was as though a deal had been struck; you can have diversity, minority rights and discrimination laws if we can have privatisation, deregulation and tax cuts. The effect of this was to take policies that were popular with the public off the agenda on the grounds that they were publicly unacceptable. Politicians proposing renationalisation and high taxes on the rich or the restoration of capital punishment and cuts to immigration tended to be dismissed as eccentric, even though many voters were in favour of such things.

As American political scientist Alan Wolfe said:

The right won the economic war, the left won the cultural war.

Or, as David Goodhart put it, the two liberalisms won, the economic liberalism of the right and the social liberalism of the left:

What if a lot of people feel that there’s no point in voting because whoever you vote for you get the same old mix of economic liberalism and social liberalism – Margaret Thatcher tempered by Roy Jenkins.

The two liberalisms – the 1960s (social) and 1980s (economic) – have dominated politics for a generation.

Even during the Thatcher period, when economic policies shifted to the right, the liberal policies initiated during the 1960s, and the social changes that went with them, continued apace. Conservative politicians may have railed against ‘political correctness’ but they didn’t do much about it. Racist and sexist language that would have passed unremarked in 1979 was considered unacceptable by the time John Major left office. Corporal punishment in schools was abolished under Margaret Thatcher and, while there was much tough talk on immigration, her government did little to change the existing laws. The Conservatives even shied away from illiberal legislation that would have been overwhelmingly popular, such as the re-introduction of capital punishment. Voters might have thought they were voting for socially conservative policies but what they got was economic liberalism.

If the right had quietly abandoned the culture war the left seemed to do something similar with the economic war. By and large, Labour under Tony Blair accepted privatisation and de-regulation. It tried, with some success, to mitigate the rise in economic inequality by using redistributive taxes and benefits while advancing its socially liberal agenda. Its Equality Act in 2010 said very little about economic equality. As Peter Mandelson might have said, the Labour government didn’t mind people getting filthy rich provided they had the right equality and diversity policies in place.

All of which meant that politics began to drift away from some working class voters. Voters who were socially liberal or economically on the right got at least some of that they wanted. Those in the top left quadrant were quietly ignored.

A YouGov poll in 2015 found majority support for both “radical left” and “radical right” policies. Policies that might be dismissed in the broadsheets as unworkable or even a bit bonkers were actually quite popular.

The survey also found that all policies except for workers on boards had majority support among UKIP voters. Perhaps more surprisingly, between 40 and 50 percent of Conservative voters backed the ‘radical left’ policies and a majority of Labour voters were in favour of the suggestions on benefit cuts and ending parole for murderers.

The accompanying commentary said:

All of this points to a contemporary mindset that defies traditional classification. It is possible for the same people to believe several things at the same time which come from opposite ends of the traditional ‘political spectrum’.

Most tellingly, although 63% of British people are at least fairly clear on what is meant by the left/right terms, the largest group (43%) say they don’t think of their views as being right or left wing.

Is this really a contemporary mindset, though, or just one that was ignored for years? My grandfather would not have found any of this at all strange. A former soldier, miner and trade union activist, he believed in nationalisation, workers’ rights and the welfare state, while also having a low opinion of ‘shirkers’ and a slight mistrust of foreigners. He would not hear a word said against the royal family or the armed forces. Every profile I read of union leader Bob Crow remarked on the fact that a left-wing firebrand such as he was also in favour of the death penalty. In that, I suspect, he was not that far away from many of the people he represented.

Support for the death penalty was, as Eric Kaufmann pointed out, strongly correlated with Brexit voting intention. He argued that the Brexit vote was primarily about values, with the EU referendum providing an issue around which those with socially conservative values coalesced. That can be seen on John Burn-Murdoch’s chart, with the block of Leave voters spreading across the left-right divide but concentrated mostly on the authoritarian side of the chart.

I think Resolution Foundation Director Torsten Bell had it about right when he observed that many of the Leave voting areas had been left behind economically decades ago but that there was a cultural aspect to the vote too:

[T]his isn’t just about the numbers – it’s about culture, outlook, lifestyle and what we feel a sense of belonging to. That might not be the normal thing for an economic research organisation to say, but it’s true. And it’s also, as many people noted last night, a function of the coalition that underpinned the leave vote – shire Tories combined with Britain’s industrial heartlands. In a sense, though, this is simply a different sort of left-behindness. Left behind by the shift in the cultural zeitgeist as well as the economic changes.

Those in that top left quadrant had suffered economically and, at the same time, the prevailing political culture had gradually moved away from them. The referendum gave them a chance to upset the apple cart and they took it.

This leaves the main political parties with a problem. Doing what they have done for the past few decades isn’t going to cut it any more. Their dilemma is made more difficult because, when you start unpacking some of these political and cultural attitudes, there is yet more nuance. Take something like social conservatism. Acceptance of same-sex relationships has increased significantly over the past half decade or so, especially among people describing themselves as Christians. In contrast, attitudes to race and ethnicity have not moved as much. British Social Attitudes data suggest that people are a little less racially prejudiced than they were 30 years ago but the report contrasts this with the sharp drop in homophobia. Simon Hix, Eric Kaufmann and Thomas Leeper found that, for all the referendum rhetoric, voters were actually more concerned about non-EU migration than migrants from inside the EU.

A study by Populus for the Legatum Institute in last September looked at several aspects of social liberalism. It found, as you might expect, that younger voters were more socially liberal. Here, again, the general acceptance of same sex relationships shows up but the attitude to crime is also interesting. Younger voters, on balance, want tougher punishment for criminals and a more order society.

The same study, much to the disappointment of its sponsors, found significant support for renationalising transport and utilities and a generally unfavourable view of capitalism. Nationalisation found majority support among Conservative voters and across all age groups. The suggestion from some Tories that renewed support for nationalisation comes from young Corbynistas who can’t remember how bad things were in the 1970s doesn’t really stack up.

When it comes to the corporations and the labour market, there is little to cheer the deregulators. The light-touch approach of the last three decades is no longer popular with the voters, if indeed it ever was. Peter Mandelson might be relaxed about people getting filthy rich but the majority of people, it seems, disagree.

The common theme emerging here is that people want the government to do more. Whether it’s about crime and immigration or stopping profiteering and ensuring greater equality, the underlying theme in all of this is a desire for more government action.

This is why I think it is unlikely that post-Brexit Britain will become the deregulated shrunken state that many of those who bankrolled and ran the Leave campaign hoped for. It does raise the question, though, about what politics might look like in the next decade. The Brexit vote revived the idea that people can actually change things by voting and the surprise result of the last election suggests that voters might be getting the message.

It’s tempting to look at the data from the surveys I have covered in this post and conclude that a party advocating greater state intervention in the economy together with a crackdown on crime, curbs on immigration but with a liberal attitude to sexuality and soft drugs might be onto a winner. Something like a British Pim Fortuyn, perhaps. Politics is more complex than that, though, and a first-past-the-post parliamentary system without a directly elected presidency is the most hostile environment for insurgent parties. Ironically. UKIP only made the headway it did because of the proportional system in the European Parliament.

Nevertheless, those who talk of realignment are right in that the Conservative and Labour parties will almost certainly have to shift the positions they have held for the last few decades. The voters have started to break the Overton Window. It will be interesting to see what they let in.

 

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The UK’s Brexit options are limited

I had thought for some time that, in the Brexit negotiations, the question of the border in Ireland would be quietly fudged and kicked into the next phase of the process. In the event, it was noisily fudged and kicked into the next phase of the process. For, despite all the drama, nothing much has changed. Or, at least, the UK government is talking as though nothing has changed.

The crucial paragraphs in the Phase 1 agreement published on 8 December are these:

Paragraph 49:

The United Kingdom remains committed to protecting North-South cooperation and to its guarantee of avoiding a hard border. Any future arrangements must be compatible with these overarching requirements. The United Kingdom’s intention is to achieve these objectives through the overall EU-UK relationship. Should this not be possible, the United Kingdom will propose specific solutions to address the unique circumstances of the island of Ireland. In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all- island economy and the protection of the 1998 Agreement.

Paragraph 50:

In the absence of agreed solutions, as set out in the previous paragraph, the United Kingdom will ensure that no new regulatory barriers develop between Northern Ireland and the rest of the United Kingdom, unless, consistent with the 1998 Agreement, the Northern Ireland Executive and Assembly agree that distinct arrangements are appropriate for Northern Ireland. In all circumstances, the United Kingdom will continue to ensure the same unfettered access for Northern Ireland’s businesses to the whole of the United Kingdom internal market.

There are essentially 3 reasons why customs borders exist:

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

A free trade agreement with the EU would only get us over the first of these. To avoid the second would require continued membership of the EU Customs Union (or the negotiation of something similar). To avoid the third we would need to stay in the European Economic Area and abide by the rules of the single market.

This gives the government a problem. If it is serious about its guarantee of no border checks, it can’t fulfil its stated aim of leaving the Single Market and Customs Union. Yet, almost every day, a government minister repeats that the UK will do just that. The problem with this is that the moment the UK leaves the customs union, there have to be border checks. There is really no getting around this.

There is no high-tech solution to make the border disappear. The idea that border checks will take place somewhere discreet, far away from the border, is also nonsense. The law-abiding would comply but the point of border checks is to discourage the would-be law breakers. As officials from Norway and Switzerland explained to MPs in November, even the most technologically advanced countries with the most friendly relationships with their neighbours still have border checks. When you move from one customs regime to another, there is a visible border.

Even if we suspend disbelief and pretend that it would be possible to construct an invisible border, the government hasn’t made any plans to put the necessary systems and infrastructure in place.  It has left it way too late to have anything ready for March 2019 and it is doubtful that the work could be completed by 2021. The technological solutions suggested would be expensive and would take time to implement. The National Audit Office isn’t convinced that the systems already in development will be ready in time for Brexit so there isn’t much likelihood of new ones being delivered on time.

Furthermore, the government hasn’t put any money aside for new customs systems and infrastructure. The £3bn extra spending for Brexit preparations, announced with much fanfare in November, has, according to the Office for Budget Responsibility, all been allocated as resource spending (RDEL):

Of the scorecard RDEL measures, the largest increases relate to 2018-19 and 2019-20, where a cumulative £3 billion has been allocated to Brexit preparation and another £3 billion for the NHS. The 2019-20 ‘efficiency review’ announced in Budget 2016 has also been scaled back. These measures explain most of the total increase in RDEL spending in those years. From 2020-21 onwards, increases to RDEL plans are more modest.

RDEL is day-to-day spending, so it would cover things like training, extra staff, consultants, legal fees and, possibly, some upgrades to existing systems. There is, however, no capital spend allocated. So nothing for new systems, CCTV, number-plate recognition, satellite tracking or new lorry parks.

Not only are the government’s statements about leaving the Single Market and Customs Union incompatible with its guarantees on the Irish border, they are also inconsistent with what it is actually doing. The infrastructure question also applies to the borders at the UK’s ports in Kent. So far, no plans have been made or funds made available to create any new border infrastructure. The government may be talking about leaving the Customs Union and Single Market but it is behaving as though very little will change.

This doesn’t give the UK much room for manoeuvre in the trade negotiations. There is a narrow range of options which would enable the UK to keep some of its red lines and avoid the need for border checks.

Sam Lowe was initially joking when he suggested the Jersey Option but something like it might be where we eventually end up:

 

Being inside the Customs Union and in the Single Market for goods, as Jersey currently is, would get around all the physical problems associated with Brexit. If the UK then stayed outside the Single Market for services it would probably be able to avoid free movement and the application of EU law to areas like employment protection. The Channel Islands, for example, do not have TUPE laws.

A crazy idea? Well George Peretz reckons it might be an option at least for the transitional period because it also has the advantage of preserving the UK’s trade agreements it has with other countries through the EU. A similar principle underpins the Institute for Public Policy’s “shared market” approach, published today, which combines regulatory alignment with a UK-EU customs union.

The problem with these options is that they would prevent the UK from negotiating trade deals, at least on goods, with other countries outside the EU. This is something that the government is still insisting it wants to do.

But we can’t be in a customs union and have separate trade deals. Or, to put it anther way, as soon as we have trade deals with other countries we have border checks in Ireland and we need a customs infrastructure that we haven’t even started planning for yet.

There is, then, no way that the UK government can have everything it says it wants. Something has got to give. The options available therefore look something like this.

Post-Brexit Options

If we want trade agreements with third countries, there will have to be some customs checks on the Irish border. Even if we want to maintain our most important red line, control of immigration, which was the most important issue for Leave voters, there is only a narrow range of options which allow it to co-exist with the guarantee of no hard border. Perhaps the Jersey Option, or something like it, isn’t as absurd as it sounds.

Update 19/12/2017

The Guardian’s Brussels correspondent Jennifer Rankin reported today that Michel Barnier showed this slide to EU leaders. It explains how each of the UK’s red lines rule out the various options for a post-Brexit trade relationship with the EU.

By sticking to all the red lines we end up with a Canada or Korea style trade deal, both of which would result in a hard border in Ireland.

But would the EU agree to such a deal knowing it would mean a hard border?

As I said, something has to give.

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Post-Brexit: Technology won’t make the Irish border disappear

The Brexit talks have stalled over the question of the Irish border. They were always going to, if not now, then later on in the process. This isn’t because the DUP and the Irish government are being difficult. It is simply because the position of the UK government is incompatible with the position of the UK government. This paper, by a group of legal academics, put it succinctly:

The UK’s negotiation positions are mutually exclusive; it is not possible to simultaneously exit both the EUCU [Customs Union] and the Single Market and fully avoid a physical border.

The customs union has a border around it. That’s the whole point of it. At the moment, both the UK and the Republic of Ireland are inside that border. If the UK places itself outside that border, then the new border becomes the UK’s border with the EU. In declaring that the UK will leave the EU Customs Union and Single Market, while also saying that there will not be a hard border in Ireland, the British government snookered itself before the EU had even picked up a cue.

Having realised, belatedly in most cases, that this is a major stumbling block, pro-Brexit politicians have argued that it would be possible to create an invisible border – a border that complied with all the legal requirements but that no-one could actually see. It would therefore still feel as though there was no border. People on either side of the border could commute, shop and trade without being stopped for customs checks. Electronic gadgets, drones and container tagging are among the suggestions put forward, all of which might help. The trouble is, none of these will completely remove the need for border checks.

Last month, the House of Commons Northern Ireland Affairs Committee took evidence from Norwegian and Swiss customs officials. The conversation is quite amusing, in parts, as the Norwegians patiently explain that, despite high levels of co-operation, sophisticated technology and their country being in the EEA, there still have to be some customs checks. As the BBC reported, Dr Bock, the Swiss official, said that an invisible border was theoretically possible but then went on to give a number of practical reasons why it would not be. Their operation was, he said, so slick that they now only needed to stop around 2 percent of those crossing the border. But with 13,000 commercial vehicles crossing the Irish border daily, that would still mean over 200 searches each day. Furthermore, Dr Bock explained that the Swiss blitz the border every so  often and conduct random checks on all commercial vehicles:

From time to time, we are doing control days where we check more or less everything.  Of course, this only works for one or two hours and then every truck driver in Europe knows that we are doing controls.

Even when his people are not obvious, they are still watching:

When you do not see us at the border, it does not mean that we are not there. We have people on nearly every international train. We are in unmarked vehicles around. We have observation systems in place.

And however good the technology is, this is still a physically policed border:

I am a big fan of technology: I am now leading the biggest digitisation project in Switzerland, with 400 million Swiss francs.  But, finally, you should remember that Customs and Border Guard work is fieldwork done by people.

At the end of the day, you need people who are performing checks.  You need people who have local knowledge and local feeling.

A fascinating paper published by the European Parliament last month outlines some of the solutions that may be possible if the UK and Republic of Ireland adopt best practices from around the world and state-of-the art technologies. It concludes that it would be possible to significantly reduce the number of border checks. However, as the report’s author clarified recently, this still wouldn’t completely remove the need for a border:

A further problem with technological solutions is that most of them rely on CCTV and number plate recognition. The UK government’s commitment to no physical border infrastructure could be interpreted as ruling these out. Cameras might also become targets for sabotage, as this European Parliament paper (part of the same release as the technology one above) warns:

Any such system, whatever the details, would involve electronic devices to identify and record every vehicle crossing the border. These devices could be easily put out of action, sabotaged, or destroyed, just as traditional customs posts could be.

And even when you have identified rogue operators, you still need people on the ground to find them.

Any such system would have to deal with vehicles that were not equipped to cooperate with the system. They would need to be identified and traced. Recognition only by number plates would be insufficient: number plates can be easily changed or falsified. In theory, all vehicles could be marked automatically by laser, and it is suggested that non-reporting vehicles could be traced by satellite telemetry, or by random checking on the ground to identify laser-marked vehicles. But any such system would involve a significant lapse of time between the time of crossing the border and the time when the vehicle was inspected, if it ever was. During that time the goods could be concealed. Even if satellite telemetry were regarded as feasible, it would merely locate the vehicle, and it would still be necessary to reach it on the ground for inspection. In short, any such system would necessitate a considerable degree of physical surveillance within the importing region, and could not be relied on to be effective to control smuggling.

A customs border means that someone has to search vans and trucks. As Dr Bock, the Swiss customs official, said, however good your technology you still need boots on the ground.

The truth is that, if it were that easy to invisibly police customs borders, countries would have done it by now. The fact that even the most technologically advanced countries with the most friendly and co-operative relationships with their neighbours still need to carry out customs checks shows that we are unlikely to be able to eliminate the border in Ireland with satellites, flying machines or any other gizmos.

Which leaves us back where we started. The UK government can’t leave the Single Market and the Customs Union and, at the same time, avoid a physical border in Ireland. Perhaps some form of words will be found next week to allow us to fudge our way to the next stage of the Brexit talks but, if it does, the issue will just come up again when we start to discuss trade terms. All this talk of technological solutions reminds me of those corporate bosses who have no idea how to get out of the mess they are in but assure their staff that everything will be OK once the new system is implemented. Technology is never enough on its own though. It certainly won’t dig our government out of the corner into which it has painted itself.

Perhaps the Irish have done us all a favour this week by bringing to a head a problem that has been there all along. Contrary to the British stereotyping, the Irish don’t believe in fairies any more. They know there is no magical solution to the border question and, as the UK started this whole Brexit process, they are quite reasonably asking our government for answers.

Update: Chris Giles has a piece in the FT on just how much of a pain in the backside being outside the customs union is:

For trading companies, each load requires a customs declaration, multiple forms and stamps by the tax authorities to ensure that the formalities are closed on each side before goods cross the tax border. Within the EU none of this applies because complete regulatory alignment is married to an EU VAT regime, all within the customs union. The EU VAT system has its problems, but ensures that goods can flow across borders with no border formalities.

The Swiss-French border is efficient. There are no applicable tariffs. Regulations for goods are fully aligned. There is a common travel area between the two countries without the need for passport checks. But the border requires hard infrastructure because Switzerland is not in the EU VAT regime nor its customs union. Border frictions have separated markets either side of the border to the detriment of consumers.

Regulatory alignment would remove only some of Brexit’s border barriers in Ireland. The UK and Ireland should take note.

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Cold comfort budget

Budget Day is a lot less exciting than it was under George Osborne. Gone are the 31 percent cuts to day-to-day public service spending and the incredulous response from, well, anyone who knew anything about public spending. Gone too are the confident assertions that the total elimination of the public deficit could be achieved in four years. No more insistence that the deficit could be cut at the same time as taxes without damaging public services. No more ‘Back to the 1930s‘.

The most interesting thing that happened yesterday was the publication of the Office for Budget Responsibility’s economic and fiscal outlook. As expected, this downgraded the GDP forecast from poor to utterly dire.

Even by the standards of recent years this is bad. It’s the first time that the OBR’s GDP forecast has been under 2 percent for every year. Half a decade of per capita GDP growth at less than 1 percent would be unprecedented in the post-war period.

So what has caused this downgrade?

Mostly the OBR’s re-evaluation of the UK’s productivity prospects. After years of expecting productivity to recover from its post-recession shock, the OBR has concluded that the UK’s low productivity may be set in for some time.

The report comments:

As the remarkable period of post-crisis weakness extends – and as various explanations pointing to a temporary slowdown become less compelling – it seems sensible to place more weight on recent trends as a guide to the next few years. But huge uncertainty remains around the diagnosis for recent weakness and the prognosis for the future. We have assumed that productivity growth will pick up a little, but remain significantly lower than its pre-crisis trend rate throughout the next five years.

Now it’s worth noting here that the OBR hasn’t written off productivity growth completely; it just thinks that the growth, when it comes, won’t be as strong as previous forecasts indicated. Should productivity growth disappoint even against this modest expectation and continue to bump along at the post crisis average, then we are looking at an even lower growth forecast but let’s not go there for the time being!

The upshot of all this is that the deficit reduction target has been kicked down the road. With forecasts like these even George Osborne couldn’t have brazened it out. A mere 19 months after George’s final budget, no-one is talking about eliminating the deficit in the near future. 

Chart by Resolution Foundation

As Torsten Bell said, this implies the acceptance of public debt remaining at around 80 percent of GDP. On current trends, it will be 2031 before the public finances are in surplus again. The bogeyman of public debt, on which two elections were won and lost, has disappeared over the horizon.

 

Does this mean that austerity is over then?

At first glance it might look that way. The government plans a 33 percent increase in per capita capital spending over the rest of this forecast period. It is also easing off slightly on the cuts to day-to-day public service spending (RDEL).


Look a little more closely though and much of this is accounted for by an extra £3bn for the NHS and an extra £3bn to prepare for Brexit.

Of the scorecard RDEL measures, the largest increases relate to 2018-19 and 2019-20, where a cumulative £3 billion has been allocated to Brexit preparation and another £3 billion for the NHS. The 2019-20 ‘efficiency review’ announced in Budget 2016 has also been scaled back. These measures explain most of the total increase in RDEL spending in those years.

In other words, there isn’t much to ease the pressure on other government and local authority services.

On social security there is also a slight easing, for example, removing the waiting time for Universal Credit but, as the Resolution Foundation says, the impact of this is dwarfed by the policies of the 2015 budget.

Figure 28 shows how the overall impact of measures announced before Autumn Statement 2016 are set to be far greater than the impact of those announced since. When it comes to tax and benefit policy George Osborne is basically still the Chancellor. These earlier policy announcements are set to leave the poorest third of households an average of £795 a year worse off, barely offset by a total mean gain of £75 a year in scal events since (including £35 a year from yesterday’s Budget). That compares to a mean gain of £210 a year for the richest third of households pre-Autumn 2016 and a net mean loss of £25 a year in measures announced since.

To sum up, then, the deficit elimination target has been kicked so far into the future as to be meaningless but the pain associated with it continues. The economy is so weak that we must keep borrowing and still keep cutting. The public debt is likely to stay where it is, relative to GDP, for some time.

Of course, the OBR could be wrong. Having been over-optimistic in the past it might be over-pessimistic now. That said, if the OBR has under-estimated the impact of Brexit on trade, productivity and public finances, things might be that much worse. When the economy is about to experience a shock, even the OBR’s modest productivity predictions look a tad optimistic.

I remember in 2011, people I know in the public sector talking about things ‘getting back to normal’. In other words, they expected a short, sharp shock of austerity and budget cuts followed by a return to business as usual in a slightly slimmed down organisation. They are not saying that now. Here we are six years on and things are looking as grim as ever. We are told we are on the way to sunlit uplands but when we get there, I fear the light will be cold and glittering.

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Dave, Boz and Lee’s Global Adventure

Dave, Boz and Lee are three relatively well-off brothers. Every year they like to spend a few weeks living it up at the 7-star Resort Europa. They have been going for years and all the staff know them well. They are sometimes a little badly behaved and have, on occasions, been quite rude. However, they are among the resort’s highest spending customers, which tends to mitigate any bad feeling their eccentric antics might cause.

This year, though, things have been worse than usual. Dave has been muttering about what a dump the place is and Lee has been telling everyone he could get a better deal at any one of dozens of other posh resorts. Boz has been especially rude, telling racist jokes and making up offensive ditties about the staff. It all came to a head this morning when the three brothers decided they were leaving. They wrote a terse note to Donald, the resort manager, then they packed their bags and walked out.

“But gentlemen, you have not paid your bill,” cried the receptionist as the lads walked out of the lobby.

“Whistle for it!” replied Boz as he flicked a v-sign.

But once outside, the boys had a bit of a surprise.

“I say,” said Boz, “it’s a bit parky out here.”

The boys had been so absorbed in the delights of the resort that they hadn’t realised the temperature had dropped considerably since they arrived and was now hovering somewhere just above zero.

“Let’s get ourselves a cab to the airport pronto. Who’s got the tickets?”

“I thought you’d got them,” said Dave.

“So did I,” said Lee.

“Sooo, you didn’t book the flight back Boz?” asked Dave.

“Well, ah, right, hmm. A minor problem. Look, we can just call the airport and book flights. I mean, how hard can it be to get a flight out of here?”

“I’ll get on it,” said Lee.

One hour later, Lee was looking a bit sheepish.

“Actually, this is turning out to be a bit more difficult than I thought. I spoke to some bloke called Roberto who said that it’s not that easy to arrange flights from here on the spur of the moment. He told me that usually people plan for these things well in advance and getting a flight out of here could take weeks.”

“Typical unimaginative and inflexible bureaucrat,” grunted Boz. “Oh well, let’s go and stay at one of those other places you were talking to.”

“Well I haven’t actually sorted any of them out yet….”

“Stuff this,” said Dave, “I’m not standing freezing to death out here. I could do with a drink. Let’s go back inside.”

“Yes, I fancy some cake,” said Boz.

“And I could do with a massage,” said Lee. “Holding that phone to my ear for an hour has given me a stiff neck. I think I’ll head for the health spa.”

The trio marched back into the hotel.

“Bloody door won’t open,” fumed Boz, as he waved his key card over the security pad.

“Neither will mine,” muttered Dave”

“I say, you,” shouted Boz as he grabbed one of the staff. “Why won’t my key card work?”

The concierge examined it with his hand-held device. “It appears you have checked out, Sir. The card won’t work once you have checked out.”

“But we only want to pop in for a drink and some cake. And we have spent a lot of money here over the past few weeks.”

“You can’t use the hotel facilities once you have checked out,” replied the concierge.

“More bloody red tape! Do you want our money or not? It’s no wonder this place is going down the pan when you turn away people who are trying to buy stuff from you.”

“Look, this is getting us nowhere. Let’s go and sort it out at reception,” said Dave.

“Bugger,” muttered Boz, “they’ve got Michel the head receptionist on the desk and he’s a right miserable sod.”

“Hi Michel,” said Dave , “we’ve got a bit of a problem. We’d like to grab a quick drink and something to eat but we can’t get in because our cards don’t seem work.”

“But you have checked out,” said Michel. “That’s why your keys won’t work.”

“Yes but we only want to pop to the bar and restaurant,” said Dave.

“Do you now want to check back in again? If you do, it would help if you paid your bill as well,” said Michel.

“Typical inflexible and unimaginative jobsworth,” shouted Boz, “Look, do you want our money or not?”

“Of course, you are good customers, replied Michel, “but the normal practice is to pay your bill.”

“Normal practice,” scoffed Boz. “You don’t conquer empires by going on about normal practice.”

“But I’m not trying to conquer anybody,” replied a bemused Michel, “I just want you to pay your bill.”

“Over there!” shouted Boz. “Dieter the barman will make you see sense. We spend so much with him, he’ll tell you to let us back in. Hey, Dieter. DIETER! We want a drink. Tell this idiot to let us through this bloody door.”

Safe behind reinforced glass, Dieter studiously ignored the commotion in reception and carried on rearranging his bottles.

“Hey Dieter, you big fat sauerkraut-munching wankerer. Do you want to keep selling us that premium German lager or what? Do you want the bar tips to keep coming? You know you need us more than we need you. Tell Michel to let us in.”

Dieter seemed to have gone deaf.

“OK, what about Carlo, the restaurant manager? Hey Carlo, do you want us to keep buying your grub and all that prosecco we’ve been throwing down our necks? Come on, you need our money. Tell jobsworth Michel here to let us in.”

Carlo hunched his shoulders and concentrated hard on laying the tables.

“They’ll soon come round when they see their profits walking out the door,” muttered Boz.

“OK, here’s a suggestion,” said Dave. “We’ll check back in for another week or so at the full whack. How does that sound?”

“But it is normal to pay when you stay somewhere,” said Michel. “Paying for next week doesn’t get you out of paying for the last six.”

“OK then, just let us in for the next few hours for a drink and something to eat. Oh and a massage. Come on. You know you want our money.”

“It is true that you have been good customers,” said Michel, “but you chose to check out. Use of the resort facilities is restricted to paying guests. If we let people in off the streets, we would no longer be an exclusive hotel. We would simply be running pay-as-you-go bars and restaurants. The whole point of Resort Europa is exclusivity. That is what you have been paying for all these years. If we offered everyone the exact same benefits as those who pay, our brand and business model would be destroyed.”

“You can take your business model and shove it up…”

“OK, Boz, let me deal with this,” said Dave.

But Boz was on a roll, “Inflexible sclerotic bureaucrats! I’ve spoken to Mummy and she’s going to go over the heads of these suited nonentities and talk to the owners. That’ll sort them out.”

An hour later, though, the news wasn’t good…,

“Oh FFS!” said Boz, “I’ve just had a note from Mummy. She’s spoken to the owners and she thinks we will probably have to pay at least some of our bill.”

“And I’ve had a text from Uncle Phil,” said Dave. “He thinks we should pay up too.”

“Well Uncle Phil always was a boring old fart,” snorted Boz.

“Look chaps,” said Lee, “There are 60 hotels queuing up for our custom. I’ll ring round and see what deals I can do.”

“60? I thought you said 42,” replied Dave.

“60, 42, whatever,” said Lee. “Just leave it with me.”

Two hours later…..

“Well this is all a bit bloody strange,” said Lee. “I can’t get through to anybody. I’ve left messages but no-one is getting back to me. Must be these dodgy foreign phone systems.”

“What about the Orange Man at the Stars and Stripes?” asked Boz. “He always said he’d do us a good deal.”

“The Orange Man is behaving really oddly. One minute he loves us and the next he’s calling us names and telling us he’s going to increase the price by 220 percent.”

“But Mummy held his hand and everything,” said Boz.

“Excuse me gentlemen,” said Michel, “I am trying to be as flexible as possible here but you can’t hang around in the hotel lobby forever. You have checked out so you must make preparations to move on. Sooner or later I’m going to have to insist that you leave. The clock is ticking.”

“Well bugger you!” said Boz. “Come on chaps. When it comes to this dump, no deal is better than a bad deal. We’re out of here.”

“OK, so what now?” said Dave, as the cold late afternoon air sliced through his thin jacket. “It will be dark soon and we’ll freeze our nuts off if we don’t sort something out.”

“I’ll get on the phone to the other resorts,” said Lee. “There will be loads of deals on offer.”

Another hour went by and, with the sun sinking, the boys were running out of time.

“Still can’t get through to anyone,” said Lee. “It’s either straight to voicemail or I’m put on hold for ages. CAn’t understand it.”

“Well we need to think of something. It will be dark soon,” said Dave.

Just then, three SUVs with blacked-out windows pulled up across the road. Seven Chinese men in identical dark suits got out and began walking towards the lads.

“Wait a minute. I know him,” said Boz, pointing to the group’s leader. “Hi, Mr Xi! Remember me? We met at a conference in London.”

“Of course,” said Mr Xi, as he shook hands with Boz. “An interesting few days and a visit to one of your excellent English pubs with your boss, as I remember.”

“That’s it. And a spiffing banquet,” said Boz.

Mr Xi glanced at the boys’ cases. “Are you moving on somewhere?”

“Fancied a change of scene,” said Boz. “There are much better places than this one on offer.”

“So where are you headed?” asked Mr Xi.

“Oh, not sure yet, but there are plenty of sunlit uplands out there,” said Boz.

“Cut the bullshit, boys,” said Mr Xi. “It’s all over town. You’ve had a row with the Europa, done a runner and now no-one will do business with you. As I see it, you’re in a bit of a hole.”

“Well I don’t think that’s quite fair…” began Boz.

“Save it!” said Mr Xi. “I haven’t got time for this. Look, why don’t you stay at my place. It’s an up-and-coming hotel called the New Han Empire.”

“The New Han Empire, eh? Sounds swanky,” said Boz.

“Wait a minute,” said Dave, “I read a review of that place. ‘A gulag that treats its staff and guests like peasants’ was the verdict.”

Mr Xi bristled. “I find the term gulag highly offensive. OK, I had to lean on a few people for the star-rating but we hosted a very successful international sporting event recently. We had our conference a few weeks ago and I asked repeatedly if there were any complaints. There were none. Not a single one. You should not believe everything you read in your western guide books.”

“Look lads, why don’t we stay at Mr Xi’s place until I can get some of these other deals sorted out,” said Lee.

“Ah, those ‘other deals’,” chuckled Mr Xi. “Good luck with that.”

“OK. How much?” asked Dave.

“There’s no point in asking,” said Mr Xi. “You can’t afford it. Your reputation has spread and no-one out here will offer you banking facilities or extend you credit. You will pay your way by working for me. You are all fairly well-connected so you can help me build my global business empire. I may also have some other little jobs and errands I need doing.”

“What sort of jobs and errands,” asked Boz.

“That’s for me to say and you to do,” snapped Mr Xi. “In any case, I don’t see that you have much choice. You can either get in the car and come with me our freeze to death out here. What is the English saying? Ah yes. Beggers can’t be choosers. It’s your call.”

 

And there, dear readers, we must leave it, with our heroes on a cliff edge. Will Michel and the Resort Europa relent and let the boys back in? Will Lee’s deals come off in the nick of time? Will the boys freeze in the cold night air? Or will they throw themselves on the tender mercies of Mr Xi and the New Han Empire?

Watch this space for the next exciting instalment of Dave, Boz and Lee’s Global Adventure.

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1.5% growth is the economy’s speed limit

There was a good discussion on the Bank of England’s interest rate rise on the World at One yesterday. (It’s here at around 34 minutes in.)

Duncan Weldon explained that the interest rate rise was driven by pessimism, not optimism. The Bank has taken its foot off the pedal not because the economy is speeding ahead but because, even at the slow speed it is chugging along at, it is already starting to shake. Jajit Chadha also used a car analogy, explaining that the Bank can only use the brake and the accelerator but can’t do much about the problems with the engine.

The Bank of England was already on board with the motoring explainer, declaring that the economy’s speed limit is now GDP growth of 1.5 percent per year, way below its pre-crisis trend. The Bank believes that there is very little spare capacity in the economy.

 

The clapped out engine, of course, is the economy’s chronic productivity problem. This, says the Bank, is due to low investment and the inefficient use of labour and capital.

The contrast with the pre recession period is sharp. At the moment, all that is increasing is employment. The UK’s output is only rising because more of us are working and so the number of hours worked has gone up. What we manage to produce per hour hasn’t changed. As a country, we are working harder but not smarter. In previous decades, output increased because we became more efficient. Nowadays, like Rick’s Sandwich Bar, we are growing the business simply by throwing more and more low-paid people into the fray.

The Bank’s outlook is gloomy:

Taken together, these factors are consistent with productivity growth remaining subdued in coming years. Alongside modest labour supply growth, that will weigh on growth in the
United Kingdom’s overall potential supply capacity, which in turn will limit the speed at which output can grow before it leads to domestic inflationary pressure.

As Duncan says, this is actually more important news than the rate rise.

The Bank of England has drawn similar conclusions to the Office for Budget Responsibility; the UK economy’s problems are deep-rooted. The productivity stagnation and low growth isn’t simply a hangover from the recession, it is something that looks to be set in, at least for the next few years.

If growth of around 1.5 percent per year really is as good as it’s going to get for the rest of the decade, it will mark a significant shift from what most of us have been used to for most of our working lives. The economy used to trundle on at around two-and-a-half percent and most of us took it for granted. When there were recessions we made up the ground afterwards. Not any more. We have now had ten years of stagnating wages and what little growth there has been has simply been the result of putting more hours in. The Bank of England and the OBR have, effectively, written off growth prospects for the rest of the 2010s. Those people who warned of a lost decade when the financial crisis hit may turn out to have been optimistic.

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