Hammond’s spring statement was no new dawn for the UK economy. It was an optical illusion

The bonanza, in the end, failed to materialise. There had been a fair amount of talk before the Spring Statement that Philip Hammond would be in a position to unveil a new dawn for our beleaguered public finances. City analysts had been chattering like South London parakeets about a potential £10bn permanent improvement in the public finances.

And the excitement had jumped the species barrier from the Square Mile to Westminster. The ardent Brexiteer Jacob Rees-Mogg had squawked about the imperative of ratcheting up spending on the struggling health service. Other Tory MPs had similarly chirruped in favour of a loosening of the Government’s austerity corset. The Chancellor himself had allowed himself to refer to “light at the end of the tunnel” in conversation with Robert Peston at the weekend.

Well the light of the tunnel may not quite have been the headlights of an oncoming train, but, according to the Office for Budget Responsibility, it was certainly an optical illusion.

The OBR did revise down its estimate of public borrowing in 2017-18 by around £5bn on the back of fuller than expected tax revenues so far this fiscal year. Yet Robert Chote and his team concluded that this was not likely to be a permanent improvement, mainly because they now estimate that the economy is overheated relative to their estimates in November. In other words, when things naturally cool down, the tax revenues will start undershooting. 

Similarly, the overall GDP growth forecast for the UK is a smidgen better this year. But next year – when Big Ben (may) ring out for Brexit– it is unchanged at a paltry 1.3 per cent. This, we should bear in mind, at a time when the rest of the world is growing at its strongest rate in years. And the expected UK growth rate is actually shaved down in the final years of the OBR’s forecast in 2021 and 2022. What the Spring Statement giveth, it also taketh away.

The Chancellor might have rebranded himself as Tigger, rather than Eeyore, but the OBR was channelling the lugubrious blue donkey when it concluded: “There seems little reason to change our view of [the UK’s] medium-term growth potential.

City scribblers earn their bread speculating about the short-term ups and downs of the economy and the public finances. But what really matters for our long-term living standards is the UK’s productivity growth potential, the amount of output we can collectively squeeze out of each hour worked and each worker. And the big picture is that productivity has been as flat as a pancake ever since the Great Recession a decade ago. Or at least that was true until the second half of last year, when we, surprisingly, witnessed the best two consecutive quarters of productivity growth since the financial crisis.

Yet the OBR doesn’t think the UK’s productivity growth engine has started roaring again, since the improvement in 2017 was driven by fewer hours being worked, rather than higher output. A similar surge happened in 2011 before petering out. Another broken promisein other words. Let’s hope they are wrong, but there’s not much reason to believe it, particularly given ongoing public spending cuts and Brexit continue to dampen the animal spirits of households and companies.

And what of that pachyderm in the living room? What about Brexit? The consensus of serious economists is, of course, that Brexit will harm our growth potential by throwing up trade obstacles between us and ourbiggest commercial partners and, probably, reducing useful immigration to boot. And the OBR is not demurring from that. Its view, articulated way back in 2016, that Brexit would damage the UK’s public finances, wiping out any “dividend” from not making annual contributions to the EU Budget, still stands. And that’s based on the assumption the Brexit process is nice and smooth.

In the short-term, the OBR, conceded the economy had held up better than it expected immediately after the plebiscite. But this was partly due to the unexpected global growth spurt, partly because households seem to have dipped into their savings to support their spending. Moreover, as the OBR stressed today, it simply doesn’t regard the Office for National Statistics’ estimates of how the economy performed since the vote as reliable.

In short: as you were. The new Brexit dawn for the British economy looks remarkably like the old one.

#Brexit #GDP #PhilipHammond #SpringStatement

Why do so many businesses parade their humane values yet treat their staff so badly?

Form and substance in the modern workplace are, as we have been learning in recent weeks, not to be confused. Before Christmas the noodle chain Wagamama apologised after a charming printed note in one of its London restaurants was discovered warning staff: “No calling in sick!… Calling in sick during the next two weeks will result in disciplinary action being taken.”

In theory, the employees of that branch could claim all the usual protections of the law, including the right not to be expected to haul themselves into work if they weren’t well. In practice, they could not.

In theory, Gary Smith of Pimlico Plumbers was self-employed. That’s what his contract said. In practice, Smith was fired by the company after he tried to reduce his hours after suffering a heart attack, implying he wasn’t truly self-employed after all.

The form and the substance were very different things.

Not all examples of the gulf between the two are so eye-popping. Many of us will have had bosses who proclaim “my door is always open” when it really isn’t.

This form and substance dichotomy applies more broadly. Oxfam and Save the Children were, outwardly, communities of mutually supportive individuals striving to make the world a better place. But recent revelations have painted a picture of harassment, bullying and even predatory sexual behaviour towards disaster victims at these charities.

The BBC has long preached the gospel of equality for its workforce. But after discovering disparities of pay between men and women doing very similar jobs, many of the corporation’s staff now dismiss this as humbug.

On and on the scandal sheet of managerial abuse goes, from the English women’s football team to Parliament. 

But, you might object, isn’t this traditional hypocrisy from bosses, rather than an illustration of some deeper philosophical or economic point? Haven’t organisations always behaved in this way: presenting an appealing face to the outside world while behaving in an uglier fashion in private? Isn’t this the way of our fallen world? 

To some extent, yes. Since Adam delved and Eve span, there never has been a golden age of workplace harmony. Yet the gap between the carefully crafted public image and the reality has perhaps never been so yawning. 

Modern economies like Britain’s are increasingly services-based and customer-focused. Most companies now grasp that they need to pay attention to their image or risk a swift and possibly lethal backlash, especially faced with the speed and reach of social media.

The words “corporate social responsibility” – largely unknown in boardrooms three decades ago – have become ubiquitous. Every organisation now claims to be an equal opportunities recruiter when it advertises vacancies. All companies profess to care about their employees. Many even tell the world that their staff are their “most important asset”.

Yet the power relations within companies and organisations – between managers and the managed – have not kept up with this rhetorical revolution. Unionisation rates peaked in the 1970s and have continued to fall steadily ever since. Theresa May promised to put workers on boards in 2016 when she became prime minister. But the pledge was watered down to almost nothing after pressure from the corporate lobby.

One of the great economists of the 20th century, Ronald Coase, asked the question: why do we have firms? Why isn’t everyone self-employed, hiring out their services to an organisation, whether public or private, and maintaining maximum flexibility for themselves? The answer Coase came to was the incentive to minimise transaction costs. Drafting endless short-term contracts for each bit of work is onerous and expensive. It’s often more cost effective and profitable for us to organise ourselves into collectives, as employers and employees.

But how should relations between employers and employees within a firm or organisation be determined? By a long-term employment contract is the obvious answer. But not every future contingency can be covered by a contract. They are incomplete, something studied in detail by another eminent economist, Oliver Hart.

When an employment contract is incomplete, who decides what happens? Who decides on the division of the organisation’s surpluses, pay rises for staff, promotions, changes in working conditions, training opportunities, on dispute resolution? This is where the issue of manager-staff power relations comes in. The managers tend to have the “residual control rights”, or final say, when contracts are incomplete.

Germany should not be presented as a utopia for workers. Yet it is a place where, through its practice of employees being represented on companies’ supervisory boards and its norms of “codetermination”, the forms of managers’ proclamations of respect for workers and the substance of that relationship are markedly closer than they are here. Germany has a developed at least a partial institutional solution to the inequality of power that stems from incomplete contracts.

If we truly desire the substance, not just the forms, of a harmonious and mutually respectful workplace, we should learn from that.

#codetermination #incompletecontracts #OliverHart #RonaldCoase

Water privatisation is a burst-pipe dream

Last year Thames Water was hit with a £20m fine for polluting the waterways of Oxfordshire and Buckinghamshire with a billion and a half litres of raw sewage between 2012 and 2014.

The judge cited a “failure to report incidents” and a “history of non-compliance” by the company. Equipment was unmaintained. Warnings from employees went unheeded by management.

Thames’s conduct was branded “disgraceful”, justifying the largest financial penalty for pollution in UK corporate history. While all that was going on Thames’s boss, the aptly named Martin Baggs, received a 60 per cent pay rise, taking his total annual remuneration to above £2m.

Now Thames (along with three other private water companies) has let down its customers again, leaving them high and uncomfortably dry after pipes burst in last week’s big freeze. And, once again, it’s apparently corporate incompetence at work rather than just bad luck.

“Water companies have been warned time and again that they need to be better at planning ahead to deal with these sorts of situations,” fumed Rachel Fletcher, the head of the regulator, Ofwat, today.

So presumably, if history is a guide, Thames’s current chief executive can look forward to a bumper payday.

Owning a water company isn’t a licence to print money. But the cash does flow extraordinarily freely in this sector. In the financial year ending in 2017, according to data collected by Ofwat, the private water companies raked in total revenues from households and businesses of £11.7bn. Their profits before tax were just under £2bn.

That equates to a profit margin of 17 per cent, which is extraordinarily elevated for a natural-monopoly public utility. Such plump margins enabled the water companies to pay out £1.4bn of dividends, in total, to their shareholders. Between 2007 and 2016 total dividends summed £18bn.

The industry points to higher levels of investment by water companies since the 1980s as evidence that privatisation has worked in the public interest. But much of that capital spending was mandated under European Union environmental regulation. It would have happened anyway, even if the regional water companies had never been sold off by the Thatcher government back in 1989.

And that £18bn in dividends in the decade to 2016, incidentally, was roughly equal to their total profits over that period. Investment for the future pretty clearly ranks behind shareholder returns for these companies. A broad survey of the state of the privatised water industry reveals a scene almost as unpleasant as those befouled Oxford waterways.

We see tax avoidance through the creation of complex webs of offshore holding companies. We see firms loading up on debt to benefit from lower interest rates. We see the gains from lower borrowing costs not being adequately shared with customers, who have seen bills rising well above the rate of inflation over the past 30 years. We see remuneration for executives beyond the dreams of any equivalently senior public sector employee.

Even the quondam Thaterchite Environment Secretary, Michael Gove, now accepts most of this charge sheet. And we can reasonably supplement it with proven managerial incompetence and regulatory ineffectiveness.

There are reasons to be sceptical of Labour’s argument that water nationalisation would lead us to a promised land of good customer service and efficiency. Pipes would still burst under national ownership.

Public servants are perfectly capable of bungling.

Yet it would also be a land without financial engineering, grotesque cash extraction, endemic tax avoidance, and stratospheric managerial pay. That’s worth something. Improve and tighten regulation instead, say some. But what should the new framework be? Where in the world is privatised water working satisfactorily for consumers? There is, in fact, a global trend of re-municipalisation of privatised water provision, driven by many of the same problems of unwarranted private value extraction and managerial incompetence as we have seen here.

Given the failures of the past 30 years, the onus is surely on the defenders of the status quo to justify it; to explain why in Britain water, and the financial rewards from its supply, should continue to flow uphill.

#nationalisation #ofwat #privatisation #water