Monday, 13 March 2017

Economics with a 'C': The Treasury, Hard Brexit and the spring 2017 budget

I don't know about you but I had a most entertaining read this morning* while drinking my coffee. The source of my delight was a fantastically hysterical article by the Independent (and its associated comment section) regarding a supposedly leaked document from the Treasury warning about the dangers of a "hard Brexit", that is to say the UK leaving the EU without an agreement and reverting to World Trade Organisation (WTO) rules.

Unfortunately I didn't have time to sit around all morning watching events unfold, which is a shame because the hysteria seems to have spread like wildfire and I would have dearly liked to have been able to simply sit there and watch the masses of "remain" supporters work themselves up into an absolute frothing frenzy over nothing, their zeal and righteousness for their cause matched only by their complete lack of understanding as to what it was they were getting worked up about.

And thus today we're going to go all "Economics with a C" (as opposed to Ekonomiks?). As such I'd like to ask you now to cast your mind back briefly to the Treasury report that was produced pre-referendum, detailing the possible economic outcomes following a Leave vote. I wrote an article about it at the time if that helps. What specifically I would like you to remember about it are two things. Firstly, that it laid out two scenarios; "shock" and "severe shock". There was no "good", "modest" or indeed any other conceivable outcome. The Treasury simply assumed that the economy would falter, as that is what its analysis had come up with.

Secondly I would like you to remember that the report turned out to be (ironically enough, exactly as predicted) complete and utter horseshit of the first order. Apologies for my language (there's more where that came from later).

But seriously, I can't remember all of the little details off the top of my head but what I do remember is that it got basically everything wrong. And I do mean basically everything. For example the analysis (definitely wasn't a prediction, because predictions are uncertain and the Treasury was certain, laying out the facts to inform people and all that...) was for job losses on the order of 500,000 to 800,000 over the course of the four quarters following a Leave vote. Well we're a bit of over a quarter away (sort of) from the anniversary of the referendum and so far unemployment is... still lower than it has been for 11 years, pre-financial crisis. Not so much a "shock" or a "severe shock" as a "what were you lot in Whitehall thinking?".

This largely stems from the fact that the Treasury - as I pointed out at the time - basically appears to have just bullshitted the whole thing. They came up with a formula seemingly pulled out of some interns arse and just applied the made up result to the OBR's then existing growth forecasts for the UK. The result was a miss so embarrassing that even Gareth Southgate and Noel Hickey would have winced in sympathy (YouTube "Noel Hickey miss" if you want a good laugh). The Treasury at this stage has about as much credibility when it comes to economic forecasting as Timmy Mallet.

Or at least that's how low its reputation should be and indeed is among many, but then that wouldn't allow remoaners to bring up this fresh report and whip themselves into a state of near ecstatic madness at the chance to spread some more doom and gloom and act like the sky is falling in, perhaps in the hope that they can sway enough middle ground voters in the event of a second referendum. It is both highly amusing and yet sadly pathetic to watch at the same time.

As is the hysteria among even some Leave minded voters and analysts at the prospect of a "hard Brexit". Granted, it would be better all round if we could come to some kind of amicable agreement with the EU before we leave. That would be the most desirable outcome. But if no agreement is forthcoming then it really isn't the end of the world. Everyone shitting themselves about things like 5% tariffs on such and such export seems to be oblivious to the fact that the Pound has already fallen 12% against the Euro since the referendum, so in effect would still be cheaper to foreign consumers than they were before the referendum.

This doom and gloom attitude also ignores three other important issues. One is the fact that most of the rest of the world still trades with the EU without having a Free Trade Agreement with them, and seems to do just fine. Second is the fact that every time the EU finally does get around to signing an FTA with someone, the UK (and indeed the rest of the world) benefits from any decrease in tariff rates thanks to the most preferred nation clause in the WTO rules. 

And thirdly, people seem to forget that a major aspiration (it's safe to use that word again now the politicos have forgotten it) of the Leave campaign was to become a forward thinking, globally minded trading nation. The whole point of cutting free from the EU's shackles was to go out into the world once again and make waves. That means some dynamic, innovative ideas are required.

Ideas like re-shaping the very way that nations conduct trade and commerce agreements. Rather than negotiating endlessly for year after year about all the minuate of a complex FTA, the UK could set the trend by seeking out willing and active partners (of which there are many) with whom it could sign what I like to call Interim Trade Agreements, in effect mini-FTAs (better names on a postcard please). 

These would be far more simple agreements, especially focusing on those issues which both parties mutually agree on from the start. They would not attempt to be, nor make any pretence of being, full blown trade agreements. Their purpose would be to secure quick deals on certain issues, such as beneficial visa arrangements, as well as looking at tariff reductions on a limited scale to open certain import/export opportunities (does the UK really need a tariff regime on oranges for example?). More comprehensive deals could follow at a later date.

Will it be easy? No. The innovators curse will of course mean that the UK ends up being the worlds guinea pig for such deals, allowing others at a later date to benefit from the UK's learning experience and make slicker deals that avoid many of the pitfalls. But the UK faces a bold new beginning, one that calls for bold new thinking. If ever there was a time to leverage the UK's goodwill, old relationships and the expertise of the Foreign and Commonwealth Office, then it's now.

Of course one thing would that would definitely help a post-Brexit UK would be to have the government's finances in good order, so on the back of this clunky arse segue let's look at the recent budget announcement.

Or not as the case may be. I say this because the Chancellor Philip Hammond is about as boring and lightweight as politicians come. He is the lettuce to someone like Donald Trump's wild hot sauce. He'd be a decent option to run the NHS, on the basis that it could use a stable, safe and boring pair of hands right now. The man to fix the country's financial woes though? Hmmm, not so sure.

It's a testament to his dullness that the biggest talking point of the budget is the rise in national insurance payments for self-employed people. I have to say I was as surprised as many, given that the reason to have self-employed people pay less NI was because they don't receive as many benefits from it, at least if we adhere to the somewhat risible notion that National Insurance payments actually mean something other than just another source of cash for the central pool.

Aside from that the budget was rather bland. That is until you open the actual budget document itself and read the text, instead of listening to Hammond's miserable speech. 

It gets off to a cracking start (What? ECONOMICS IS EXCITING!! Promise) where literally on the very first page we get a "WTF moment" as the kids would say, as we're told that somehow the Office for Budget Responsibility (OBR) has come to the conclusion that rising inflation over the coming years will cause consumer spending to decline. This is surprising given that normally a rise in inflation does the exact opposite, it causes people to spend more. This is precisely why the last Labour government set the Bank of England a 2% target rate of inflation, because they were well aware that it would encourage people to keep spending and keep the economy ticking over. 

This on its own makes the budget for me. That one statement alone is so bizarre, so head scratch inducing, that it makes me wonder whether the OBR is actually a real thing or just some sock puppet that talks to ministers when they spend too much time in their office and cabin fever sets in. To counter the OBR's assertion one only need (if one is in posh mode) look at the recent consumer spending figures, which continue to rise even as inflation settles in. It's almost like the widespread knowledge that prices are rising encourages people to go out and spend now, rather than wait. Or in other words, how inflation is generally understood to influence consumer spending, providing wage growth stays within touching distance (it will nearly always lag a little behind).

Next up on the budget bonanza we come to the obligatory pie charts, which show that the government intends to overspend by a mere £58 billion this year. Look at it this way, that's less than £5 billion per month! What a bargain eh? Not buying the spin? No, nor am I. It just amazes me that anyone - least of all a conservative government - thinks this is ok. I understand they're trying to bring the deficit down gradually, but blimey there's gradual and then there's glacial. It's all other peoples money though, so I guess that makes it alright.

You'll be pleased to know that £46 billion pounds of that expenditure is purely spent on paying debt interest, which gives you a good idea of how staggeringly mismanaged our government finances have been for so long, given that this is now year 7 of the "austerity" (stop laughing) years. I'm also delighted to report that the Treasury still hasn't caught up with the generally accepted principles of pie charts, that see most people put the different segments next to each other in size order.

Skipping ahead we get all the usual bumph about OBR forecasts for things, like their remarkable assertion that the year on year growth in productivity per hour - which was 0.8% in 2015 and 0.6% in 2016 - will suddenly jump to 1.6% in 2017. Do they not understand how much time some of us spend arsing about on Twitter? 

Then we get to asset sales. A nice paragraph about how well the sale of Lloyds is going and how the government is on track to recover its investment, which does ever so slightly ignore the fact that the government had to borrow money to make that "investment", which involves the payment of interest. Other than that gripe, the Lloyds sale is doing well. Below that is a single sentence about the prospect of selling its shares in RBS, which can basically be translated as "Nobody wants this shit, we can't even give it away at a discount", which just serves as the exclamation mark on how much of a monumental fuck up the bail out of RBS was.

Other than that it's business as usual at the treasury. Fart-arsing about around the edges, little bits added here, little bits taken away there. Minimum threshold for income tax rises to £11,500, which means if you're even close to being a full time worker on the minimum wage then you still end up paying income tax (we're all in this together don't you know) so lucky you. The government continues in its endeavour to try and herd cats by reforming tax avoidance legislation, resolutely ignoring the advice of virtually every study that's ever been conducted into the subject to just simplify the system right down so there are less chances to dodge tax in the first place.

It continues to tax companies for the awful and wasteful practice of employing people; continues to tax citizens and businesses at rates as high as 20% for that most decadent of activities, spending money on things; continues to charge people for the privilege of buying insurance; and continues to tax the revenues of private citizens, but only the profit margins of companies. Oh, and people with kids get yet more free money to help them avoid the consequences and responsibilities of having children, this time for child care. Because fuck it, why not?

In summary; don't panic. The world is not collapsing. Nor is the country. Budget wise the government continues to live by that old American axiom...

... Situation Normal. All Fucked Up. Have a nice day.

*NB: I started this yesterday (Sunday).

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