Imagine how other people feel

One of the great achievements of the Enlightenment was a sense of other. Instead of thinking only of ourselves, or our tribe or locality, European societies began to think philosophically about other people and their rights and duties. Although religion was a motivator, this respect for others became a doctrine in its own right.

Here is hoping that, after the disputatiousness of 2017 and a further decline into a bizarre negativity in public and social discourse, we can renew our respect for other people, their feelings and their proper selves.

I was very struck earlier in the year by an impromptu speech US Defence Secretary Jim Mattis gave in Jordon. He told US soldiers, to “just hold the line”, because Americans “need to get back to respecting one another, and showing it.”

Adam Smith, book of the year
It is for this reason my book of the year is Adam Smith’s other great work, The Theory of Moral Sentiments. This was published in 1759, 17 years before his more famous Wealth of Nations. It is deceptively simple, arguing that sympathy for other people is the basis of all morality.

The historian Simon Schama has gone so far as to argue that it provided the intellectual underpinnings which made the Acts of Union between England, Scotland and Ireland work.

The reason The Theory of Moral Sentiment is my book of the year is twofold. First, by coincidence, the thoughtful Conservative MP and transport minister, Jesse Norman, is publishing a biography of Smith in 2018, which he says will put particular emphasis on Smith as a moral philosopher and not just as an economist. It is intended to sit alongside his recent biography of Edmund Burke (a friend of Smith).

Secondly, it is my firm belief that the great task of our time is to bring the country back together: to respect one another, to compromise and to calm the hysterical and obstructive public rhetoric we find on Brexit, but also numerous other issues. All this has been amplified by social media which, in my opinion, needs regulating. Nor do the continuing rumpuses in Parliament help.

Prosperity UK
In April this year, it was my privilege to help organise the Prosperity UK conference in Westminster, which brought 600 business people, bankers, politicians, academics and journalists from all sides of the debate to look beyond the Referendum to how we might make a success of Brexit.

I was easily the least distinguished person on the advisory board, which was co-chaired by Sir Paul Marshall and Lord Hill of Oareford, and included the Marquis of Salisbury, Lord Wolfson (CEO of Next), Sir John Peace (chairman of Burberry and Midlands Engine), Baroness Stroud (CEO of the Legatum Institute), Anthony Clake (a partner at Marshall Wace), Professor Sir Steve Smith, Vice-Chancellor of the University of Exeter and Professor Colin Riordan, Vice-Chancellor of Cardiff University.

I am glad to say it was a great success and, partly because the amazing goodwill and positivity in the room was sadly dissipated by the election, another conference on global trade is being planned in March, together with some more bespoke regional events. Alex Hickman, an entrepreneur, has been appointed Director and has been leading the effort. The website is HERE

A quote from The Theory of Moral Sentiments
I am sure I am not the only person to think we are never going to get anywhere as a country if we go on arguing with one another.

Adam Smith would agree. Here is a quote from The Theory of Moral Sentiments:

As we have no immediate experience of what other men feel, we can form no idea of the manner in which they are affected, but by conceiving what we ourselves should feel in the like situation. Though our brother is upon the rack, as long as we ourselves are at our ease, our senses will never inform us of what he suffers. They never did, and never can, carry us beyond our own person, and it is by the imagination only that we can form any conception of what are his sensations. Neither can that faculty help us to this any other way, than by representing to us what would be our own, if we were in his case. It is the impressions of our own senses only, not those of his, which our imaginations copy. By the imagination we place ourselves in his situation, we conceive ourselves enduring all the same torments, we enter as it were into his body, and become in some measure the same person with him, and thence form some idea of his sensations, and even feel something which, though weaker in degree, is not altogether unlike them. His agonies, when they are thus brought home to ourselves, when we have thus adopted and made them our own, begin at last to affect us, and we then tremble and shudder at the thought of what he feels.

In other words, lets cheer up, and show some fellow-feeling, to each other and to our friends and neighbours in Europe and across the world.

Happy Christmas.

Jeremy Corbyn has not peaked, yet

The combination of Theresa May’s surprise Phase One Brexit deal, and a subsequent poll by YouGov putting the Conservatives 1% ahead of Labour on 42%, suggest the tantalising prospect that Jeremy Corbyn’s popularity has peaked.

A reasonably competent Budget, so the narrative goes, the fact that Brexit is stumbling on, and the commendable stamina of the Prime Minister, means the worst is over for the Conservative party, which has been on its knees since the election.

Local election results
I am not so sure. If you look at the local by-election results, you get a very different picture: the Lib Dems are back. They have won a slew of unnoticed little victories, including in the Surrey market-town of Godalming last night, where they took the ward of Godalming Central and Ockford on 37.8% of the vote, after the Conservative vote dropped by 6.5% to 35%.

Since the General Election in June, there have been about 150 local by-elections, 32 wards of which changed hands. The Lib Dems have won 16 and of those, they have taken nine from the Conservatives and only three from Labour.

One should be careful about extrapolating too much from local elections scattered across the country. But the return of the Lib Dems in Conservative areas – presumably fuelled by defecting middle class Remainers – does mean it is possible that if a General Election were called today, the Conservatives would do worse than they did in June.

Glimpses of mortality
That said, something about Jeremy Corbyn’s conduct and that of his party in recent weeks does provide a glimpse of his political mortality. Hubris, money, questions about potential election fraud and social divisiveness have started to make themselves evident.

A whiff of arrogance is gathering about Mr Corbyn. I was very struck by his videoed attack on Morgan Stanley two weeks ago. Not because he indulged in a bit of the usual banker-bashing, but because at one point he proclaimed excitedly “We are the Government-in-waiting.” The threat to move the Bank of England to Birmingham also suggested a sense of entitlement which the electorate may not find attractive.

The public finance companies have also used their financial statements to indicate the cost of nationalising the public services they manage, which have protection and break clauses. According to the John Laing Infrastructure Fund, it would cost 86% of the assets they manage. Scale that up to cover the whole industry, and renationalising the 730-odd PFIs alone would cost at least £50bn.

Then there is the cost of renationalising the Royal Mail and the utilities. It is not hard to come up with not only a bill of well over £100bn, but a terrible legal quagmire. Shadow Chancellor John McDonnell claims renationalisation would “cost nothing” because it would be paid for by new Government bonds.

When it comes to money, even the most financially innocent person can understand that Labour’s plans don’t really make sense.

The Electoral Commission also said this week that it is investigating Momentum’s spending at the General Election. Having been involved in various political causes, where paranoia about money and rules is an everyday concern, I have often asked myself how Momentum manages to run a 31,000 strong membership and support the Labour party very effectively on a shoestring.

According to its spending return for the June election, in which Momentum was registered as a “non-party participant”, it reportedly spent only £38,743, just £257.46 below the £39,000 legal limit.

Finally, there is the issue of social divisiveness. I keep hoping the current climate of suspicion and factionalism, made worse by social media, will burn itself out. At this point this is just wishful thinking, but a candidate preaching unity and respect – as Democrat Doug Jones did successfully in the Senate race in Alabama this week – may one day emerge and wrongfoot Mr Corbyn and his trolling, angry cronies.

The current conduct of the Conservative party – not least its splits over Brexit – and its failure to address convincingly long term issues such as the Student Loan system, stamp duty and the NHS do not inspire confidence. If a new generation of leadership emerges and gets its act together, we could indeed see Corbynism peak and fade very quickly. But that has not happened yet.

800 years of interest rates. Did high interest rates set off the Wars of the Roses or even Game of Thrones?

Here is a light historical distraction, for those who take a long-term view.

We are currently in the midst of the third longest secular bull market in bonds ever (at 36 years), beaten only by one from 1441 to 1481 (40 years) and the record of 1605-1672 (67 years).

I know this because the Bank of England has just published a fascinating blog , and Staff Working Paper Eight Centuries of the Risk Free Rate.

The highest ever developed market real risk free rate, of 23%, apparently occurred in 1453 with the siege of Constantinople, when it finally fell to the Ottomans. The 26-year old Sultan Mehmed II had already conquered the important silver mines of the Balkans and there were fears he would disrupt Venetian trade. Only the subsequent arrival of gold and silver from the New World really ended the specie drought.

These ultra-high interest rates put our own history into some perspective, especially the Wars of the Roses.

1453 was also the year when Henry VI’s weak reign descended into the chaos with the loss of his French possessions after the Battle of Castillon. Like the siege at Constantinople, the losers at Castillon were for the first time bombarded into submission by artillery.

With the loss of its French possessions, the English crown also lost a substantial portion of its revenues, especially the tonnage and poundage on wine shipments from the Dordogne and Gironde rivers.
The financial situation was made worse by Henry’s lavish of devout tastes: spending much of his dwindling revenues on his foundations of King’s College, Cambridge, and Eton College. One might facetiously argue that those establishments continue to cause political trouble 700 years later.

No wonder a terrible civil war ensued. Everyone, including the King, was skint.

The data set has been culled and amalgamated from various sources, commencing with Prestiti perpetuals issued by the Republic of Venice. The first open market quotations are from 1285, when Prestiti apparently yielded 6.625%.

This year’s record low yields are not unprecedented. In the first quarter of 1946, US Treasuries yielded a similar 1.4%. Real yields were also a negative 5.3% due to a repurchase programme.

The Wars of the Roses are famously the inspiration for George R.R. Martin’s Game of Thrones. Although he does not mention yields, the fact the crown is heavily in debt to the Iron Bank is a backdrop to the plot and Queen Cersei is contemptuous of money lenders. I wonder if there was a bear market in bonds in Westeros too?

We need more than Caractacus Potts

We cannot take the suspense. Philip Hammond labours like Caractacus Potts in the Treasury shed. Creak, bang, curse, he tinkers away into the night, preparing to unveil his latest Budget contraption on November 23rd.
There is a sense of foreboding too. Will it fly beautifully, like Chitty, Chitty Bang? Or send him careering dangerously around Westminster, like the malfunctioning rocket pack?

Judging by the speculation in the press, it would be well to stand clear. First, (hammering noise) an income tax cut for young people was mooted and then dropped. Now it is being suggested that a temporary cut in stamp duty for first time buyers is a possibility.

I am no fan of stamp duty – the worst tax on the statute book, amidst stiff competition – but we should be suspicious of such a fiscal Toot Sweet. Prices for first time buyers would simply rise to take account of the cut. They have already been artificially lifted by the subsidised loans in the Help to Buy scheme.

The benefits would similarly accrue to the vendors, largely housebuilders, whose profit margins, share prices and executive remuneration are already at record levels. A recent study by Morgan Stanley found that Help to Buy had contributed to a 15% premium in new house prices, matching almost pound for pound the cheap 20% equity loan provided by the government. (Wait till the initial 5-year period runs out and the interest rate goes through the roof, but that is another story).

As the stamp cut would be temporary, it would be unlikely to stimulate investment in further construction of new homes.

The losers would be existing homeowners hoping to move house, perhaps to start a family, as they would be outbid on properties by first time buyers.

This stamp duty idea exemplifies a paucity of economic thinking by the current Government. If you are interested in the reform of property taxation, far better to remove the distorting effects of stamp duty altogether by cutting it to a flat 1% for both buyers and sellers. Any loss in revenue would be offset by rising revenues from new construction, VAT and higher volumes in the housing market (which remain below pre-crisis levels). A reforming chancellor might also examine the council tax bands, to ensure that those in large expensive houses pay their fair share.

Property taxation is a classic example of how, somewhere along the way, the Conservative party has lost both its market nous and its understanding of economics. The consequence is that the Government has no economic strategy to speak of and short term fix has been piled upon political gimmick.

Let us start with market nous. Unnoticed in Westminster, economic growth is accelerating. Yes, you read that right. The National Institute of Economic and Social Research – which has as good a track record as any – has said growth recovered to 0.5% in the three months to October. However, in all likelihood, inflation will remain a problem due to the rapid rise in the oil price to around $65 a barrel.

What this means is the tax revenue forecasts are probably too pessimistic and the chancellor does not immediately have to worry too much about the deficit. The deficit would be even less of a problem if the chancellor took a more long-term approach to taxation, and set taxes at levels which maximised incentives, economic growth, productivity and revenue.

If that is the good news, there is plenty of bad news. A combination of the change in the political context, exemplified by the rise of Jeremy Corbyn, the exhaustion of austerity as a political narrative, and decades of underinvestment mean that the demand for increased public spending is fierce. According to IMF data, gross fixed capital formation in the UK, at 17.2% of GDP has been substantially below the G7 average of 20.2% for 25 years.

This is mostly due to cuts in public investment, which at 2% of GDP remains below the level before the financial crisis. Indeed, one of the big contributors to deficit reduction under the Conservatives has been large cuts in capital expenditure by the Government, as opposed to cuts in current spending. Evidence of this is everywhere: traffic jams, full commuter trains, insufficient A&E facilities, a shortage of social housing, etc.

The anchor of economic policy is the so-called fiscal rule, that the Government should reduce its cyclically adjusted net borrowing to 2% of GDP. As Ed Balls explained when he was shadow chancellor, that fails to distinguish between current spending and capital investment. Controlling current spending on day-to-day items is sensible. But if the Government borrowed for capital investment, on which it made a return, who cares if it adds to the deficit at a time when its cost of borrowing is the lowest since the Victorian era?

A better option than simply raising public investment would be to revive public/private partnerships in a new form to invest in infrastructure. These could borrow via a new, properly regulated, project bond market, partly underwritten by the Government. Not only would these be kept off the public balance sheet, they would have an independent life of their own and so not be micro-managed by Whitehall. Victorians built railways, canals, hospitals and the like by tapping their own deep and liquid capital markets, and we should do the same.

Another idea which ought to be given serious consideration is using the State’s remaining stake in RBS and other assets to seed a sovereign wealth fund, which could co-invest alongside the private sector in infrastructure and innovation.
This is the sort of strategic thinking which one hopes for in the Budget and indeed from the Conservative party more widely, but with a few honourable exceptions, there is little sign of it. If we are to make a success of Brexit, we are going to need more than tinkering in the Treasury shed.

The public finances are in rude health

I know these are unfashionable things to say, but not only is the British economy in much ruder health than many commentators admit, but we all owe a debt of thanks to George Osborne. The excellent public sector finance figures published today are a dramatic demonstration of these truths.

What a pleasant surprise for the chancellor Philip Hammond on the eve of the Budget.

The great financial crisis. The deficit, the great lode star of economic policy for nearly a decade. Living beyond our means. Remember them? Well, they are sorted. Ancient history. Job done. In the year to March 2017 public sector net borrowing was £45.7bn or 2.3% of GDP. That is down massively from £152.5bn, or 9.9% of GDP in the worst year of 2010.

If anything, even that number is an exaggeration. It has been revised steadily down in the past few months by £6bn, from an initial £52bn. The Office for Budget Responsibility – which the Treasury relies upon – had originally forecast a deficit of that level too, so it has been far too gloomy, as usual.

In my opinion, judging by the trajectory of the deficit in the past few months, the picture continues to improve and my guess is we are on course for a deficit of circa £42bn in 2017/18, or 2.0% of GDP this financial year. Incidentally, the OBR is forecasting a deficit of £58.3bn for this year. That looks too pessimistic. Let’s see who is right.

The critical point about a deficit of less than 3% to GDP is it is roughly in line with the underlying growth rate of the economy. That means, relative to the size of the economy, it is stable. To draw an analogy, it is like having a mortgage which may have risen in size in cash terms, but only in line with the value of your house. So your loan to value ratio hasn’t budged.

Ideally, you want your mortgage to be gradually paid off. But the fact it is stable is very far from a disaster.

Furthermore, half of the deficit run up since March, or £19.2bn is actually made up of capital spending. Arguably, we should worry less about capital spending. It only costs the Government about 2% to borrow. If it is investing in an asset which makes, say, a 7% return (such as a new road), it can actually make sense to borrow. This is the equivalent of adding to your mortgage to dig a basement or build an extension. It can be a good thing.

What about the absolute level of debt? Well, two economists called Carmen Reinhart and Kenneth Rogoff have long advocated that countries with national debt levels of more than 90% of GDP tip into crisis. Other economists have said this rule is far too strict. But let’s, assume it is correct.

Britain’s top-line national debt to GDP is £1.8 trillion, or 87.2% of GDP. That looks scary. But on closer inspection, a big chunk of this is offset by assets held by the Bank of England and the residual stakes the Treasury owns in banks like RBS. Strip those out and our debt to GDP is tolerable 79.6%.

That is more than Germany but substantially lower than our competitors, such as France, United States and Japan and China. It really isn’t anything to worry about.

Whichever way you look at it, the performance of the British public sector finances continues to surprise positively. It is another example, like the earnings data, of how economics commentators are simply, in their very nature, too gloomy. What, I wonder could be their motive? Are they all secret Corbyn supporters? Or howling Remainers determined to do the country down?

The implications for public policy of the robust public finances are huge and nearly all good. Gone are the days where the Treasury should be squeezing spending and raising daft taxes here and there. We now have the room to take a strategic view about the future size and role of the state, without panicking about short term cash flow issues.

It means we can set tax rates to maximise growth and productivity in the medium term; we can afford to borrow to invest; and we can fix the problems which have built up in the recent past, such as the criminal 6.1% interest rate on student loans, and the punitive and distorted levels of stamp duty. We can even afford an unfairly expensive bill to leave the European Union. Sadly, there is no evidence the Treasury itself sees things that way.


It is not true we are getting poorer or that our incomes are falling

Given the economics profession’s delight in gloom, sifting out the good news from that which is actually bad requires constant vigilance.

This week is a classic example, over the average earnings data. The Office for National Statistics said that average earnings grew at an annual rate of 2.2% in August, below inflation. In other words, in real terms, average wages are declining. This overshadowed the more positive news that unemployment was at a 42-year low.

Frances O’Grady, the ever-cheerful secretary general of the TUC, proclaimed that “Pay packets are taking a hammering. This is the sixth month in a row that prices have risen faster than wages.”

But is this really true? Er, not quite. It omits the rise in self-employment. Add that back in and incomes are on average, rising, as is personal wealth.

The ONS average earnings number is based on a survey of around 9000 employers who employ 20 people or more on their payroll, not freelancers or consultants. It doesn’t capture, and nor is it intended to, the growth in self-employment, especially those who set up a new company. Many of these are actually in lower paid trades, such as construction. Such people now amount to 4.8m. or 15% of the workforce and they typically receive dividends, not just salaries.

Last month, the ONS revised up substantially the level of household incomes in the latest National Accounts. Due to the growth in self-employment and small companies, it said, households actually received £61.7bn of dividends last year, not £12.2bn as previously thought.

Not all of these dividends were spent, instead many were saved. With the result the savings ratio (the proportion of incomes being saved) was revised up to 5.4% from 3.8%. This was good news.
Some people, of course, are both employed and have companies or professions from which they earn income on the side. The growth in mini-corporate buy-to-lets is explosive, for instance, but the statisticians are only just adapting to this phenomenon.

There is a second problem with the average weekly earnings data as a proxy for our prosperity: it is before tax. So, it does not reflect the rising personal tax threshold, which has reduced income tax for millions of people, or the impact of tax credits.

A better number than average weekly earnings which picks up all the income of households, including wages, self-employed income, investment income and pensions, and which also takes account of tax change, benefits and inflation, is the so-called “real disposable household income per head” number in the revised National Accounts. This shows that actual money in people’s pockets has risen steadily in the last few years, ahead of inflation.

Real disposable income surged by 4.8% in 2015, as company owners paid themselves bumper dividends in advance of a tax change. Last year, real household disposable income per head shrank by 0.7%, mostly because dividends dropped after those bumper payouts in 2015.

This year, from what we know so far, it shrank by 1.2% in the first quarter, but then accelerated to plus 1.5% in the second quarter. So, it is not true, that on average, our incomes are falling.

Incidentally, mean real household wealth per head also rose by 3.3% last year, driven by the rising stock market and house prices. Though clearly those with the most assets benefited the most.

Even the real disposable income number has its limitations. In particular, it is difficult for the ONS to break out the impact of the rising minimum wage and the National Living Wage. We do know that, at the lower end, this has benefited some 1.3m people. As a matter of logic, for the average to be growing slowly when the lower half is rising, it must be those further up the wage scale who have been held back.

If those on lower incomes have had rising wage packets and company owners are doing okay too, it means that it is predominantly the middle classes in paid employment but without self-employed earnings who have seen their incomes fall in real terms.

Many of these work in the public sector, where we know there is a soon-to-be-dropped 1% pay cap. (That in turn does not reflect the generous future pension contributions to which the public sector is entitled). Alternatively, those who work in the private sector are exposed to both technological disruption and Brexit-related uncertainty (undoubtedly a factor in, say, universities or parts of the City).

However, the situation could be about to flip round. The Government is theoretically planning some big cuts to benefits and tax credits, which would obviously hit those on lower incomes, and the outlook for middle class salaries is improving.

The labour market is incredibly tight. According to the survey data published in the Bank of England’s August Inflation Report, companies are reporting greater difficulties in recruitment and filling vacancies. Unfilled vacancies, as a percentage of the entire labour force, are 2.31%. That is the highest ratio for about 20 years. If you ask employers, they will tell you finding the right people is their number one difficulty. In order to do so, they now have to offer new recruits substantial pay rises.

In other words, the recent lull in middle class wages is likely to be offset by rising earnings for new recruits spreading across the labour force. Unless, of course, either the Conservatives or an incoming Labour Government tip the economy into recession with their bad policies (always possible), or inflation goes through the roof, or our jobs are suddenly replaced by robots.

Next time somebody says to you “it is a disaster, we are all getting poorer.” You can say “No, that it is not true, it is middle class employees who have been temporarily squeezed, and their wealth has anyway risen strongly due to the rising value of their savings, pensions and houses”.

The squeezing of middle class wages helps explain noisy bourgeois political phenomena, such as the rise of Jeremy Corbyn or Remainers agitating about Brexit. One reason they are so cross is that many of them have indeed seen their wages stall. Hopefully it is already passing.

A bigger problem is the barriers to wealth accumulation for young people caused by the dysfunctional housing market and the student loan system.

Life in Britain is not perfect – and I am glad I am not myself wrestling with universal credit or a student loan – but we are definitely not all getting poorer. Not yet, anyway.

Philp Hammond needs to show some Peelite radicalism

Those who are accustomed to seeing Britain as an essentially market-based society, home to the City of London and a redoubtable property-owning middle class, need to think again. The Labour Party just held its annual conference and, incredibly, it is winning the economic argument.

On everything from housing, to tax increases, to student loans, to redrafting PFI contracts, to nationalising utilities, it is Labour’s socialist vision which is chiming with the electorate, as evidenced by an alarming report on the anti-capitalist state of British public opinion by the think tank Legatum published this weekend [29th September LINK ]. For instance, some 76% support renationalising the railways and 83% renationalising water companies.

Next week, it is the Conservative conference and while the media is focusing on what the Prime Minister Theresa May might say, actually it is the chancellor Philip Hammond who has the bigger task. Only he can address the economic concerns exposed by Jeremy Corbyn’s rise. What is more, if we are going to make a success of Brexit, what we do ourselves to enhance productivity, spread prosperity and attract investment is going to be just as important as the details of any exit deal.

Sadly, nothing in what Mr Hammond has said so far suggests he has any appetite for the radicalism necessary to respond to the Corbyn challenge. We must hope that this is a cunning ruse and he has in fact spent the last few months preparing a secret plan. What we want to hear from him is a robust, optimistic defence of an enterprise, market economy, accompanied by an honest programme to “the correction of proved abuses and the redress of real grievances” as the great Victorian Conservative reformer Sir Robert Peel promised in his Tamworth Manifesto.

What explains Corbyn’s rise is not simply the Zeitgiest , or social media, or an inevitable swing of the political pendulum, but the fact he is actually addressing real experienced consumer grievances like, for instance, rents rising faster than wages or rubbish and expensive trains.

The broad economic consensus around what one might describe as Osborne-ism – reduce the deficit, cut corporation taxes, and rely on monetary activism to stimulate growth – has completely collapsed. This is because its time has passed. It got us out of the financial crisis, but only at the cost of creating too many losers, especially among the young.

However, young people are in employment, so their sense of animus is derived not from lack of a job, but other insecurities, notably shrinking disposable incomes (compulsory pension contributions following student loan repayments as the latest deduction), and a lack of capital and adequate housing. It is also my firm impression that there is a sense that some companies, like airlines, train companies and BigTech get away with murder because the Government is too complacent to stand up to them.

When set alongside the high rates of income tax, the ongoing corporation tax cuts are looking like a bung to large and unscrupulous companies. Ultra-low interest rates and quantitative easing have deepened company pension deficits (which have to be filled by young workers) and pushed up asset prices, thereby creating a chasm of generational unfairness. Mark Carney, the Governor of the Bank of England, is Jeremy Corbyn’s unwitting recruiting sergeant.

The Bank is at last indicating that it may raise interest rates, perhaps as soon as November. This potentially dangerous inflection point gives Mr Hammond the perfect excuse to revisit Government policies and to work with the Bank to wean us gently off the drug of cheap money. What we need is some fiscal and monetary methadone, so we do not lurch from dependency to a crash in a few short months.

The place to start is with housing. Sajid Javid has made some progress in the Housing White Paper to address the planning system, but with the Treasury encouraging a boom in over-priced flats with both its tiered stamp duty rates of up to 12% and the stoking of a corporate buy-to-let boom, fiscal policy has piled more distortions on top the distortions of monetary policy. Mr Hammond should cut stamp duty to a flat 1% for both buyers and sellers on all properties and then flatten the forest of property-related VAT rates to a level 20%.

A reform of property taxation to a more rational system would make the market work more efficiently and stimulate housebuilding, including the construction of proper family houses. It should be accompanied by regulatory measures, such as restoring the minimum size rules for flats and introducing compulsory licences for landlords in return for their tax breaks (both Labour policies opposed, incredibly, by the Conservative party). Help to Buy, Starter Homes and all the other foolish interventions which have pushed up prices and enriched the big housebuilders should also be scrapped immediately.

Mr Hammond must next address the running sore of the student loan system. Incidentally, we could ask Steve Lamey, the chief executive of the Student Loan Company, for his advice, but he has strangely disappeared. As he was a previously highly regarded person from HMRC, we must be suspicious of his continued suspension by the Company due to a mysterious investigation. If somebody could please find him and find out what has happened, they would do the nation a service.

Given the gravity of the situation with the student loan system (which is effectively bust), Mr Hammond should announce an urgent review, so we can get to the bottom of what has gone wrong. Such a review would examine raising or staging the repayment threshold, putting the system on a proper legal footing and bring it under the aegis of the Financial Services Authority (it is currently unregulated). In the meantime, he should immediately cut the interest to the pre-2012 rate of 1.5%. 

The next leg of economic reform should be to encourage investment, especially in infrastructure. I have numerous friends who commute via road or train and all of them have horror stories about overcrowding, delays and high prices. This has been caused by population and economic growth not being matched by investment since the financial crisis. This, in turn, has held back productivity growth.

According to the Office of Road and Rail, public investment in rail was £4.8bn in 2015-16, substantially down from its peak of £7bn in 2005-6. Of this, nearly £1.3bn was gobbled up by HS2 and CrossRail. (1) Indeed, the House of Lords Economic Affairs Committee has said that on a per mile basis HS2 costs nine times as much as the TGV, the French equivalent (2).

The causes of lack of investment in transport would require an essay in their own right. They include Treasury cuts, poor productivity at Network Rail (a nationalised company, take note); faulty franchise contracts for train operators (eg Southern Rail). The syphoning off of money to pay for HS2 can only make things worse and the failure to introduce sufficient private investment via, for instance joint ventures.

Again, only a forensic review will get to the bottom of this, but in the meantime Mr Hammond can announce the creation of a project bond market to allow semi-autonomous public/private partnerships in rail, roads and housing to borrow cheaply, financed by tolls, fees and rents, but with a partial guarantee from the Treasury or local authorities. 

The sense that something has gone badly wrong with the money and that Britain is being exploited by unscrupulous international investors also needs addressing. It is a little known fact that the big City institutions, like our pension funds, have spent the last decade dumping UK shares in favour of gilts, with the consequence that, according to the Office for National Statistics, they only own a combined 10.1% of the FTSE 100. In 1998, our pension funds owned 21.7% of UK equities, that has been reduced to a paltry 3%. The sold another £6bn in the second quarter of this year. Foreign investors now own more than half of the index. No wonder our tech companies are all being sold on the cheap (3) (4).

I fear that properly addressing this complex long term issue will require another review (sorry about that), but the creation of an independent Sovereign Wealth Fund to act as a long term investor in British companies and infrastructure would be a start. It could be gifted government assets, such as the shares in RBS, to get it going.

These ideas are necessarily brief and they not exhaustive. I have not touched, for instance, on enhancing consumer protection legislation for the digital age; or the need to ensure BigTech companies are properly regulated and taxed as French President Emmanuel Macron has, perhaps overzealously, suggested (5); or binding votes on executive pay; or cutting daft taxes like air passenger duty on domestic flights and small business rates.

But the main thing to get across is that Jeremy Corbyn is winning. He is growing stronger and getting closer to Downing Street every day. Labour is ahead in the polls, by 43% to 39% according to YouGov (6) and has fire in its belly. The great institutional pillars underpinning our market system – the Treasury, the Bank of England, the City and indeed all of us who work in that system – must wake up. It is time for a well-aimed Tory kick in the backside. If it is not administered quickly by Mr Hammond and his Conservative colleagues, then the Labour lynch mob will apply more painful and destructive measures of their own. That would not only be counterproductive, but be infinitely more horrible too.


  1. Office of Road and Rail, Finance, Annual Statistical Release 2015-16
  2. House of Lords Economic Affairs Committee, the Economic Case for HS2
  3. Office for National Statistics, Ownership of UK Quoted Shares 2014
  4. Office for National Statistics, Investment by Insurance Companies Pension Funds and Trusts April to June 2017
  5. Financial Times, 29th September 2017, Macron Slams Anglo-Saxon Tech Giants
  6. YouGov Westminster Voting intention (24th-26th September 2017)
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