Stephen Says...

Stephen Says...

This is my blog

sharing occasional thoughts about things that interest me

A Basis for BREUNION?

the state of the countryPosted by Stephen Fri, November 16, 2018 14:57:43

I couldn’t resist having a peek at the famous Withdrawal Agreement about which there’s so much fuss. I was particularly interested in finding out what it had to say about farming and fisheries.

The references to agricultural support (on pp 363-364) restrict the UK to a maximum expenditure equivalent to what we would have spent if we were still in the CAP, and to not reducing the share of that spending which is on non-trade-distorting (so-called ‘Green Box’) measures.

So we mustn’t increase state spending (as if the Treasury was champing at the bit to do so) and we mustn’t link subsidies to production levels. These are not difficult conditions to comply with. In fact they ought to encourage a better bespoke British agricultural policy (less of the money going to those large farms that need it less) which might become the envy of remaining EU members (as their farm structures change to become more like ours, and the political impact of existing CAP subsidies gets uncomfortable).

The provisions for fisheries are also thought-provoking. Dealing with resource-problems that don’t respect national boundaries (free movement of fish; free movement of pollutants) deserves fresh thinking. The Brexit-related debate about fishing will promote a review of approaches to such issues that ought to be welcome.

So the Withdrawal Agreement can be seen as giving opportunities for Britain to improve existing EU policies by example or leadership. And, if successful, maybe these developments will make continuing membership more attractive. And as the transitional period can go on to the end of the century...... ..........BREUNION anyone?

Thoughts Before The Budget

the state of the countryPosted by Stephen Wed, November 15, 2017 10:30:49
The fundamental situation in global markets may be summarised as follows: stocks of food (wheat, feedgrains and soya) and fuel (oil) are high, and hence world food and fuel prices are low; interest rates around the world are also low (probably as low as they can go); nevertheless global effective demand is not growing so economic activity is not increasing.

In the UK, except for managers, directors and senior officials, average gross weekly earnings of full-time employees are lower now than they were at the end of the crisis in 2010; in real terms between 5% and 10% lower. So increases in real domestic consumption are not to be expected.

Meanwhile the British government has a persistent budget deficit. A sustained period of economic growth would generate tax revenues that might resolve this situation. Without such resolution, continuously increasing public sector debt threatens the long-term financial sustainability of the state. It is questionable whether the deficit can be addressed by substantial reductions in current spending. The alternative of increasing taxation or extending its scope is neglected.

As international interest rates increase then unless the Bank of England raises UK rates competitively the sterling exchange rate will devalue and prices of tradables will continue to increase in the UK, depressing living standards and putting further pressure on the non-tradables sector (e.g. health and social care).

Whether the recently improved conditions of the global market for manufactures (2015 to date) will be sustained and whether the UK domestic economy will be well enough adjusted to take advantage of the situation are the questions that bear down on Budget Day decisions. The OBR is widely expected to judge that productivity growth in the UK will continue to be poor. How they judge the development of the global market is unpredictable. Whether they judge that anything the Chancellor of the Exchequer does will have significant impact in itself is beyond conjecture.

I can’t envisage external circumstances riding to the rescue of the UK’s economic prospects. I think it’s up to the government to take some steps. My own recommendations are:

· Local authorities should be instructed to commission house-building, to be retro-funded by the properties’ sales.

· Implementation of road-improvement programmes should be accelerated, and cancelled rail-electrification schemes should be restored, and the Swansea tidal barrage project should be funded. This would be paid for by introduction of a 5% Employment Transaction Tax and cancellation of HS2.

· Trident renewal should be abandoned in favour of expenditure on other defence measures (e.g. putting ‘planes on the new aircraft carrier).

· Health service funding should be enhanced by 5%, to be covered in the longer term by repatriated EU contributions.

· Improved and expanded schemes for lifewide learning should be introduced, with associated redeployment of state educational resources (reduction in the school-leaving age and redirection of university finance).

The economic crisis that is just around the corner will only be a crisis for the British state because of persistent failures of the government in terms of economic policy. In particular the failure to address the budget deficit, which emerged at the turn of the century and was accentuated by the GGFC (2007-2010). Regrettably the responsibility for this failure in government policy will be deliberately obscured, presented as the consequences of the Brexit decision and hence blamed on the result of the referendum rather than, more appropriately, on the pathetic inadequacies of the political and administrative establishment (aka ‘the unaccountable élite’). The opportunity provided for this Establishment to enhance existing distractions, of the ‘divide and rule’ variety, in order to sustain the social status quo is unlikely to be missed. This prospect is exceedingly depressing, coming as it does at the centenary of the Great War Armistice and the 50th anniversary of the 1968 évènements; both anniversaries associated with failures to reform ‘the world order’.

For a detailed analysis underlying these conclusions go to:

The Economic Consequences of Brexit

the state of the countryPosted by Stephen Thu, August 31, 2017 15:39:49

Back in the day, before Britain joined the EEC, the world economy meant an outside world into which only superfluous production (production that by accident emerged without a predetermined destination) was consigned for residual disposal. As a corollary to this, no country relied upon ad hoc purchases from the outside world as the basis for their own local supply.

Nowadays all that is changed. The global market place has lost its residuary character. Prices are no longer the outcome of unrepresentative disposal sales. Instead prices are determined by the interaction of global effective demand and global availability of supply. Mobile personal information technology makes buyers and sellers well aware of market conditions, thus meaning that prices are struck across the world that properly represent commercial reality.

In this situation, when a country imposes tariffs (putting taxes on imports) it raises the price that its residents have to pay in order to get foreign produce (by the amount of the tariff). And this also allows its domestic producers to charge a higher price for their own output which is sold to local residents. But of course these domestic producers will still only get the world price for anything they sell abroad.

When a group of countries agree to operate a customs union they all agree to charge the same tariffs on produce brought into the union from outside, whilst allowing tariff-free movement of goods and services between the member countries themselves. This means that the producers in all the member countries share the benefit of the same higher prices they get than are being charged in the world outside. Likewise the residents of all the member countries are taxed equally for buying stuff from countries outside the customs union as well as paying higher prices for local products.

When a group of countries agree to operate as a single market they agree to impose the same rules and regulations regarding product quality standards and business operating procedures. By doing this they facilitate trans-border commercial activity and hope to capture benefits from economies of scale.

The European Union is both a customs union and a single market. Brexit might mean the UK being automatically outside not only the political organisation of the EU but also outside both these economic institutions (the customs union and the single market). There has been a lot of discussion about how much this might or might not matter.

The most important thing to bear in mind when considering the consequences of Britain adopting an independent (post-EU) international trading policy is that it will be based on the rules of the World Trade Organisation and that these rules forbid discrimination. This means that the EU cannot impose tariffs on British exports of goods and services that are more onerous than those applied to trade from any other country outside the EU. So there can be no ‘punishment’ for Britain in these terms.

WTO data indicate that the EU average tariff is 5%. And the simplest trade policy for the UK to adopt, when it leaves, would be to apply the same tariffs as it does already as a member of the EU. This would simply result in Britain treating EU countries the same as it already treats all other (non-EU) countries, and being treated in turn by the EU countries the same as they treat other non-member states.

The result for UK producers would be to leave existing domestic prices unchanged because they would still be defended by the same tariffs as at present. But prices received for UK exports to the EU would now fall to the same levels as apply across the ‘outside world’ (i.e. ‘world prices’, by implication on average about 5% lower). Similarly, EU exporters would now only be able to get the ‘outside world’ price for their sales to the UK (and of course the UK government will now receive the proceeds of the UK’s own 5% tariff on those imports).

A rough estimate of the implications for the British economy can be arrived at using data from recent years. In 2014 the value of total exports was £511,654m. At the same time the value of total output was £3,889,971m, meaning that exports represented 13% of the value of UK total economic output. According to the House of Commons Library (Briefing Paper Number 7851, 4 July 2017) UK exports are currently split 44% to the EU and 56% elsewhere. So the estimated value for UK exports to the EU therefore comes to £225,128m (44% of total exports and about 6% of UK total output). Now if, after Brexit, because the UK will be outside the customs union, UK exporters receive 5% less for their goods and services (their sales to EU countries no longer taking place inside the protection of the 5% EU tariff) that will mean a reduction in revenue of £11,256m. The total profits of UK producers in 2014 amounted to £700,923m. This means that if all the drop in revenue was taken away from profits it would mean a fall in profits of 1.6%. In fact, because only half the economic activity that takes place in the UK is potentially exportable, this probably means that the reduced profits will apply to only half of all the economic operators in the country and so amount to the equivalent of a 3% reduction for those companies engaged in these activities. The consequential fall in share values for such companies would also be 3%. Given that the FTSE100 is at record levels at the moment this seems a very small ‘price to pay’ for what the chatterati are calling ‘a hard Brexit’. Any preferential trade deal between Britain and the EU would be expected to soften this impact.

Of course, lest there be any doubt, I’m well aware that averages conceal degrees of variation: not all tariffs charged by the EU are 5%. As the House of Commons Library says: “The trade-weighted average EU tariff for non-agricultural products was 2.3% in 2014 and 8.5% for agricultural products”. So because existing EU tariffs on agricultural products are often more than 5%, farmland prices might fall by more than the 3% I’ve mentioned for exporters’ share prices. On the other hand anything currently EU-tariff-free might be completely unaffected. But the main thrust of my point is still germane: leaving the EU (single market and customs union) is not the economic big deal that it’s been hyped as.

In fact I rather strongly suspect that Brexit and its much exaggerated supposed economic consequences will be used to cloak a wide range of measures introduced to benefit interest groups not excluding the organs of government themselves (and including established political parties).

Post-Brexit Posturing

the state of the countryPosted by Stephen Mon, March 06, 2017 15:16:57
There have been repeated suggestions that the results of the referendum illustrate a polarised British social culture: divided according to personal preference either for or against UK membership of the EU. Misrepresentation of the evidence has been rife. The impression has been given, for example, that older people were overwhelmingly for Brexit whilst the young were overwhelmingly the other way, and hence that there is bitter division between young and old over this question. But actually the evidence shows a 3 to 2 split (for Brexit) amongst the elders and a 2 to 3 split (against Brexit) amongst the youngsters. So both opinions, for and against, were well represented amongst old and young alike. The similarity in degree of division within both groups (3 to 2 either way) makes them more alike in character than the opposite, despite the divergence in their balance of opinion. And the same argument applies to other allegedly opposed sub-groups of the franchise: Scotland was 3 to 2 for staying, Wales was 3 to 2 for getting out; the Metropolis was 3 to 2 for staying, the rest of England was 3 to 2 for getting out; the advantaged AB social group was 3 to 2 for staying, the disadvantaged C1C2DE was 3 to 2 for getting out; people with university degrees were 3 to 2 for staying, non-graduates were 3 to 2 for getting out. In all these cases the unifying similarity between the sub-groups is the division of opinion within them; they are not sub-groups divided from one another by uniformity of opinions within themselves. Promoting the notion of sectarian division between different social groups is delusional posturing, actively poisoning British cultural solidarity.

Of course if some groups are 3 to 2 in favour but the rest are 3 to 2 against, the chances are that overall the result will be 5-all! It’s because we couldn’t be sure which view was in the majority that we decided to conduct a head-count, using the relatively recent British tradition of the secret ballot (legislated for in 1872). Abiding by the result of this particular ballot is a test of our political system. And in fact it seems to me far more dangerous for society that there should be a significant preponderance (rather than a nearly 50-50 balance) because of the scope for a small minority to be subject to discrimination: picked on, bullied or victimised.

Sterling and the ONS

the state of the countryPosted by Stephen Tue, November 15, 2016 17:24:39

On October 28th 2016 the ONS published a piece concerned with the implications of changes in the exchange rate for sterling ( In this article it says: “A fall in the pound means that UK exports will be cheaper for customers in other countries to buy. This should help UK companies increase the amount of goods and services they sell to the rest of the world which would bring more money into the UK – potentially increasing employment, growth and therefore living standards.” But this is utterly flawed.

Data extracted from past issues of the ONS “UK trade in goods publication tables” unambiguously give the lie to the article’s assertion.

Here they are:

The figures indicate that devaluation of sterling in conjunction with the Great Financial Crisis was substantial: from $2.00 in 2007 to $1.55 in 2010; a fall of 22%. In consequence, the traded goods price index for imports went from 76.2 in 2007 to 92.0 in 2010; a rise of 21%. Meanwhile the traded goods price index for exports went from 75.6 in 2007 to 92.7 in 2010; also a rise of 23%. So neither in absolute nor in relative terms did UK exports become cheaper as a result of this substantial devaluation.

In fact these data are precisely in line with what ought to be expected. In reality, the prices of all tradable products are set in the global market-place and denominated in $US. Then these global prices, which apply both to UK imports and to UK exports, are translated into sterling via the exchange rate. Hence both the prices of exports (when expressed in sterling) and the prices of imports (when expressed in sterling) will rise as a consequence of sterling’s depreciation.

Before posting this, I took a look at the most recent version of the ONS balance of payments database and calculated the correlation coefficient for the series giving prices of exports (BQAJ) and imports (ELAZ): it was +0.99. And this ought to come as no surprise since, according to the 9th November issue of the ONS "UK trade in goods publication tables", you only need eight types of product to account for more than half of UK exports and you only need the same eight to account for more than half of the UK’s imports as well. The categories are: Mechanical machinery; Cars; Medicinal & pharmaceutical products; Electrical machinery; Other miscellaneous manufactures; Scientific & photographic equipment; Crude oil and Refined oil. So no wonder prices of imports and exports move together: their prices are those of the same types of products and come from the same world markets.

The price relativity which actually does change as a result of devaluation is that between traded goods, for which prices are determined in world markets, and non-traded goods (such as places in residential care homes), for which prices are determined locally (i.e. directly in sterling). Hence the major economic consequence of exchange rate change is a rebalancing of the economy between the traded and the non-traded sectors (as their relative prices are altered by alteration of the exchange rate). A fuller consideration of this analysis, incorporating detailed estimates of the relevant relative magnitudes (based on the ONS Supply & Use Tables), is available at:

European Union and the United Kingdom

the state of the countryPosted by Stephen Fri, June 03, 2016 13:58:54

In many ways it is a shame that commitment to “ever closer union” is not available to choose in the UK’s referendum on membership of the European Union. Both options actually on offer exclude this idealistic commitment which was at the heart of the project originally envisaged by the founding parents of European amalgamation (whose idea began with economic integration as a platform for associated political affiliation). In its absence, the only options available are:

either half-hearted consent to continued limited membership;

or attempted abandonment of such commitments as remain after eschewing the euro and the Schengen zone (these residual commitments being the common external tariff and regulation associated with the Single Market, plus certain common policies, such as the CAP, and financial contributions associated with funding them along with a set of EU-wide institutions such as the European Parliament).

Given this context, concentration on the economic dimensions of remaining or leaving is understandable. The free movement of resources across the unified or single market is most visibly manifest in the case of labour (i.e. workers’ economic migrancy): hence the consequences of immigration in the UK are a subject for debate. Likewise, the feasibility and financial consequences of alternative international trading arrangements are an issue requiring discussion. Unsurprisingly therefore these two topics have dominated the propaganda campaign being conducted on both ‘sides’ with a repellent lack of regard for the intelligence of the public at large.

With regard to immigration: it seems to me that the responsibility for dealing with any consequential congestion in relation to public services or infrastructure lies with the national government; and since immigrants are subject to taxation like the rest of the citizenry they can be presumed to pay their way like the rest of us (not to mention that they may be working in those public services anyway). Rejecting EU membership on the grounds of its impact on immigration is effectively a vote of no confidence in the UK national government rather than a judgement on the EU itself.

Regarding international trade arrangements: losing a protected price advantage of 5% (typical for manufactures) will eat into margins or value-added across the tradables sector of the economy whilst making such tradables cheaper for consumers. Since most businesses buy inputs as well as selling their output at such newly lower prices the impact on margins may be somewhat attenuated.

It is by no means clear that the financial consequences of abandoning the EU will be bad for the UK population in real terms. The Treasury’s analysis is completely bogus owing to the tragically flawed view of the country’s economic situation according to which the Treasury operates (see for details).

If, as a consequence of abandoning membership of the EU, sterling is devalued, then this will impact adversely upon the standard of living enjoyed by workers in the UK in the short term by raising the prices of tradable goods and services; but it will also increase margins or value-added in those same tradables-producing sectors of the domestic economy (hence also offsetting the impact of any reduced tariff protection).

The political choice that I might want is not available. Neither ‘side’ has made a case worth voting for. I would not make this choice on economic grounds. Is it worth having a vote?

Labour’s Damaging Economic Doublethink

the state of the countryPosted by Stephen Thu, January 14, 2016 10:48:53

On the on hand John McDonnell has called for “a New Economics, laying the economic foundations of a prosperous, fairer and sustainable society”. On the other hand he has promised to “demand that the Office of Budget Responsibility and the Bank of England put their resources at our disposal to test, test and test again to demonstrate our plans are workable and affordable”. But John McDonnell misses the point: it’s the Old Economics of the Treasury, the OBR and the Bank of England (what Gavyn Davies has usefully termed ‘the standard apparatus’) that is at the root of the country’s economic policy problems. Giving the OBR and the Bank responsibility for judging Labour policy involves a prior commitment to seeing things their way. And their way is completely wrong.

For as long as sterling remains a sovereign currency the exchange rate will be a significant factor affecting the country’s economic circumstances. But unfortunately both the Treasury (and hence the OBR) and the Bank (and hence the MPC) hold to the heartfelt belief that “devaluation makes our exports cheaper” (as Robert Chote puts it with technical precision, it causes “a change in the relative prices of domestic and foreign goods”). This erroneous preconception leads them to suppose that any depreciation of sterling will expand sales volumes for British goods and services (because they’re cheaper) thus boosting economic activity and employment. Such thinking is completely bogus.

Not only are the official expectations without justification in terms of economic theory, they are also directly contradicted by the evidence provided by the Office for National Statistics. The figures below amply illustrate my point.

The ONS figures indicate that the standard expectations are completely refuted. The devaluation of sterling in the aftermath of the Great Financial Crisis has been substantial: from $1.87 in the years before the crisis (2004-2007) to $1.57 in the years after it (2009-2012); from €1.47 in the years before the crisis (2004-2007) to €1.17 in the years after it (2009-2012). This devaluation raised the prices of goods imported and goods exported alike: there has been no “change in the relative prices of domestic and foreign goods”.

The traded goods price index for exports went from 74.7 in the years before the crisis (2004-2007) to 94.9 in the years after it (2009-2012); the traded goods price index for imports went from 74.4 in the years before the crisis (2004-2007) to 94.9 in the years after it (2009-2012). In technical terminology, the terms of trade remained unchanged. And this ought to come as no surprise since you only need seven types of product to account for more than half of UK exports and you only need the same seven to account for more than half of the UK’s imports as well. The categories are: Mechanical machinery; Electrical machinery; Cars; Medicinal & pharmaceutical products; Refined oil; Crude oil; and Other miscellaneous manufactures. So no wonder prices of imports and exports move together: their prices are those of the same types of products and come from the same world markets.

In fact, the ONS data is entirely consistent with the proper economic theory. In this, the crucial price-relativity affected by the exchange rate is that between tradables and non-tradables. Tradables being those things that are internationally portable (e.g. motor-vehicles; feed wheat; consultancy services etc.,). Non-tradables being those things irrevocably confined to our shores (e.g. residential property; domestic care services; the infrastructure of the public realm etc.,). The impact of sterling’s devaluation has been to raise the sterling prices of tradables across the board (i.e. both the things we buy from overseas and the things we sell abroad) because their prices are set in international markets (and not in sterling terms) and these are the prices which apply equally to ‘imports’ and ‘exports’ (translated into sterling terms by the same exchange rate), so there is no relative price change such as the official experts expect. And consider the significant difference that this makes: the flawed conventional wisdom believes devaluation is expansionary (increasing domestic output) whilst the correct theory says it isn’t (rather the opposite when you take’ income effects’ of price changes into account).

A more detailed consideration of the ONS data confirms that import and export prices within the same (tradable) product categories habitually move together (being basically the same international price of course), showing that the UK is well integrated into global market determination of producer prices for tradables. The pivotal role of the exchange rate is to alter the balance of activity in the UK economy between the tradables and the non-tradables sectors: this comes about because whilst prices in the latter (non-tradables) are inherently set in sterling, prices in the former (tradables) are translated into sterling from abroad by the exchange rate (thus changing when it changes: i.e. increasing when sterling is devalued).

Tradables and non-tradables each account for about half of national income (GDP) so the scale of this problem posed by this price change is significant. And because the government itself is responsible for a large part of the national infrastructure (non-tradable) and for purchases of (non-tradable) educational and healthcare services (on behalf of the population at large) this is an issue bearing directly on the economic responsibilities of government operation. So these observations are particularly pertinent for policy-makers of a social democratic persuasion. They provide a platform for a party with a purposive perspective on government: “a New Economics, laying the economic foundations of a prosperous, fairer and sustainable society” (John McDonnell MP speaking at UCL on 20th November 2015).

It cannot be in the best interests of the Labour Party or the people that it aspires to represent that a false picture of the country’s economic circumstances should be used as the platform for evaluation of the policies that will affect so many important aspects of commercial performance as well as standards of individual, household and community life. Sadly there is no prospect that the reviews instituted by the Shadow Chancellor will challenge the official standard apparatus: their terms of reference preclude it. The prospects for the country remain as bleak as before: see (

Talk About Taxation

the state of the countryPosted by Stephen Thu, August 13, 2015 15:26:51

I think it’s fair to say that most of us (who are not self-employed) do not pay income tax or national insurance personally. That’s because our employers transfer money to us through the PAYE system and simultaneously they transfer money to the government, as ‘income tax’ and ‘national insurance’, notionally on our behalf. But in effect what they’re doing is simply paying a levy to the government and leaving us with the amount of money that will persuade us to work for them.

I know it’s conventional to pretend that employers are making these payments on our behalf (us, the workers they employ). But it’s not the way we ourselves think about it really. In reality we all have what you might call ‘rational expectations’: we all make judgements about wages and salaries based on ‘take-home pay’; we all take decisions about offers of work after making allowance for ‘stoppages’. And certainly everybody recognises (in the light of numerous broadcast documentaries and News-items) that unemployed people evaluate offers of work in relation to post-tax earnings vis-à-vis out-of-work benefits.

This system of taxation, in which levies are paid to governments by employers notionally ‘on behalf of’ the workers they employ, operates across the economically developed world. Reviewing the way in which these levies are presented is quite interesting. The cost of making payments of income tax and social security contributions (national insurance) is expressed by the OECD as a ‘tax wedge’: the proportion of the total cost of employing workers that is accounted for by making such payments (i.e. both those that are being made notionally ‘on behalf of’ their workers - as ‘income tax’ or social insurance ‘contributions’ – and those made as explicit payments by employers qua employers).

Figures in the table below illustrate the size of this tax wedge in various comparable North-West European countries. You can see that it varies quite widely: ranging from 26.6% in Ireland to 55.8% in Belgium. The UK (31.48%) is towards the lower end of the range.

The last two columns in the table illustrate what happens if the whole amount of employment cost (‘the tax wedge’) is expressed as a transactions tax (like VAT) explicitly levied on purchases of labour. These figures show that human resources are taxed more heavily than the general run of purchased inputs (taxed by VAT) in most of the countries considered here (though it’s fair to say that some specific inputs, such as energy, attract special supplementary purchase/transaction taxes). This is appropriate because the employment of workers is the best available indicator of the level of pressure on the country’s infrastructure resulting from the operation of any particular business (i.e. the tax levied on payments to employees is a proxy for costing the use of the infrastructure as a business input; it stands in for an explicit rent, payable for the use of the infrastructure).

It should be apparent from these data that the implicit transactions tax cost of employing workers in the UK is very competitive (i.e. low) compared with that in other North-West European countries. This suggests that there could be scope for an increase in this tax-rate without the prospect of damaging the country’s competitive position internationally. In fact an increase in the UK’s implicit employment transactions tax rate (and with the increase explicitly imposed on employers rather than workers), so that overall it was raised from 45.94% to nearer the Dutch level (58.58%), might be expected largely to eliminate the budget deficit.

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