UK companies are losing patience with the ideological fantasies of Brexiteers

Comparisons between politicians and business leaders are generally to be avoided.

But sometimes they can be instructive.

Imagine if a chief executive was explaining to her governing board how she planned to tackle a major looming economic threat to the company’s profitability.

Imagine if she started her presentation with the words: “Close your eyes and envisage a new technology, which doesn’t currently exist but which we very much hope will soon come along…”

How long would she be likely to remain in her job? Indeed. But standards appear to be somewhat lower in politics. Or at least different.

There seems to be confusion about the nature of the EU’s custom union. Many commentators (and even some economists) talk about it as essentially a problem of tariffs: levies on goods as they cross borders. But this is only part of the story, and not the most important share.

The biggest economic hazard facing UK firms when we leave the EU customs union is not charges on imports and exports but disruptive new inspections and the effective severing of vital corporate supply chains.

According to a recent analysis by the Institute for Fiscal Studies, more than half of the UK’s imports from the EU are “intermediate” goods and services. This means they are not for immediate consumption by households, but rather are used in the production processes of British firms. The intermediates share of UK exports to the EU is even higher, at almost 70 per cent.

The crucial point is that outside the EU customs union, this formerly free flow of goods between the UK and the EU would have to be subject to intrusive checks – checks for compliance with local safety standards and also checks that all the applicable levies have been paid.

Even if the UK agreed a comprehensive free trade deal with the rest of the EU which abolished all goods tariffs, inspections on standards compliance and checks for possession of the requisite tariff waivers would remain.

UK-based car manufacturers are extremely dependent on component imports from mainland Europe, with parts often delivered “just-in-time”, and are, thus, highly financially vulnerable to any disruption to these supply chains. But the same also goes for a host of manufacturing sectors. This all applies, of course, to the border between Northern Ireland and the Republic, with the particular historic and political headache overlaid there.

That is why the director-general of the CBI, Carolyn Fairbairn, made an almost desperate plea this week for the Government to put evidence ahead of “ideology” and commit to a new customs union with the EU after the (hoped-for) Brexit transition phase ends in around 2021.

While this would not eliminate the need for all checks – Turkey has a customs union with the EU but its goods still have to be inspected when they enter Europe – it would be considerably less punitive for UK trading firms. “A practical, real-world answer” is Faribairn’s description.

But ideology clearly doesn’t like being put in the corner. Boris Johnson took to Twitter to slap down the CBI’s recommendation, asserting: “Staying in the customs union means effectively staying in the EU: the EU is a customs union … it means no new free trade deals, no new leading role in the WTO [World Trade Organisation]”.

“I’m confident British business can profit from the new opportunities,” he concluded, presumably while puffing out his chest.

Leave aside the typical Johnsonian sloppiness over some important detail (the CBI is suggesting the UK form “a” customs union with the EU, not remain in “the” existing customs union), his argument can be boiled down to the view that the pain of UK firms arising from this disruption will be swamped by the fantastic gains of new trade deals with non-EU countries that the UK will be liberated to sign by leaving the customs bloc.

Yet manufacturing firms are not so sanguine, which is precisely why they have been pressing the CBI to make its latest customs union recommendation to the Government. Incidentally, research by Monique Ebell of the National Institute of Economic and Social Research suggests the overall trade benefits for the UK of any new free trade deals with non-EU countries are likely to be underwhelming, certainly relative to the severe trade damage from leaving the single market and customs union. That’s some actual evidence that firms might weigh against Johnson’s indomitable personal faith.

Yet Johnson, among cabinet members, has no monopoly on wishful thinking. The Government’s official white paper on the UK’s future customs arrangements, released last August, addresses the issue of looming customs checks for British firms with little more than vague talk of “increased automation and better use of data”.

Meanwhile, the Legatum Institute, a think tank that has a firm grip on the ear of the Brexit Secretary, David Davis, has even proposed that the job of patrolling the Irish border after Brexit could be delegated to “unmanned aerial vehicle assets” and “aerostats” instead of traditional customs offices. In other words: drones and airships.

The airborne technology that could perform such a job doesn’t, of course, yet exist. But Legatum suggests “awarding a prize for technological solutions to incentivise the development of innovative solutions from the private sector, and universities”. They are no doubt as confident as Johnson that something will turn up in time.

This truly is the voice of irresponsible ideology. Small wonder that UK exporters, who would actually have to trade in this new world, rather than merely fantasise about it, are losing their patience.

#BorisJohnson #Brexit #CBI #customsunion

Be wary of attempts to rewrite the recent economic history books

“The past isn’t dead. It isn’t even past,” wrote William Faulkner. That certainly applies to the economy.

The Office for National Statistics (ONS) said last week that it had been examining its estimate for telecoms output-price inflation between 2010 and 2015. Research suggests statisticians may have been considerably overestimating this in light of large increases in bandwidth volumes available to business customers over that period.

This tentative and pretty technical bit of work has been seized upon in some quarters as implying a huge rewriting of recent UK economic history.

The BlackRock fund manager and former special advisor to George Osborne, Rupert Harrison, concluded that: “A lot of what we thought we knew about the economy is probably wrong.”

Following up, Harrison’s ex-boss himself tweeted that: “Official statistics underestimated growth for 2010-2015 and overestimated inflation, and therefore real income growth was higher during that period. Good to hear, although would have been nice to know at the time….”

The Times in an editorial joined the revisionist party stating: “The result is likely to have been an understatement of GDP and an overstatement of inflation.”

A cynic might argue that it would be convenient for Osborne and Harrison to push the idea that when they were in charge of the British economy, GDP and income growth was much healthier than currently shown in the official statistics.

But leaving aside the motivations, are the conclusions that are being drawn valid? And the answer is that there’s something a bit previous about them, to put it mildly.

First some perspective. Telecoms account for less than 2 per cent of GDP. That’s not negligible, but it’s not big enough to fundamentally change the picture of the economy, even if the sector really did grow substantially faster in real terms over the period in question.

And, in any case, aggregate output figures are always “balanced” by the ONS to aggregate expenditure calculations of GDP. In simple terms, this means that even if telecoms output is judged to have been stronger, output in other sectors of the economy would automatically have to be revised down to compensate. That’s why Richard Heys of the ONS himself has stressed this telecoms prices revision, if it were implemented into the national accounts, would be very unlikely to affect the overall GDP figures.

But what about consumer welfare? Doesn’t this work also suggest more bandwidth for ordinary phone and broadband customers too, giving them more bang for each buck of their expenditure? Hasn’t consumer price inflation therefore been exaggerated too, and real income growth correspondingly underestimated? Again, we shouldn’t jump to conclusions. First, telephone services and equipment account for 2.5 per cent of the UK’s representative consumption basket. Again, that’s not really big enough to have the kind of dramatic impact on the overall inflation rate that some of the revisionists are implying.

Further, the ONS’s new work applies only to business-to-business telecoms services, not customer purchases of mobile phone data. And there is already an adjustment for rising quality for things like mobile phone tariffs in the Consumer Price Index. This adjustment might turn out to be too small, but it’s misleading to imply there currently isn’t any allowance at all for the fact that customers could be getting more for their money due to technological advances.

The issue of how statisticians account for the rise of the fast-growing digital economy is certainly a very important one. And there may well be GDP revisions ahead, perhaps even consumer inflation revisions, which have hitherto been extremely rare. The picture of the economy in the past is actually changing all the time due to regular methodological revisions in a whole host of areas by the ONS. The past really isn’t dead.

Yet at the same time it’s spurious to make bold assertions based on thin evidence and perhaps wishful thinking about what the impact is going to be. There’s also an irony about the former Conservative Treasury team claiming some vindication for their economic strategy on the basis of this latest research, given the core rationale for their controversial austerity programme was not rising household incomes, or even GDP growth, but rapid reductions in public borrowing and the overall government deficit.

Recall that in the 2010 “emergency” Budget, Osborne outlined bold plans to achieve a surplus on the structural current budget in 2014-15. In fact it was still 2.6 per cent of GDP in that year. And there is still no projected overall surplus in sight, despite the many promises of ministers. The theory that the economy has been doing much better than implied by the current official figures sits rather uncomfortably with the fact that tax revenues have been so disappointing relative to expectations eight years ago.

The past may not be dead when it comes to official economic statistics, but that doesn’t mean we can casually rewrite history in a way that suits our interests and reputations.

#GeorgeOsborne #OfficeforNationalStatistics #GDP #telecoms #RupertHarrison

Both the left and right have their ideological blinkers on when it comes to Carillion’s failur

Psychologists have identified a phenomenon they call “confirmation bias”. This is the tendency for people to interpret new information in a way that simply confirms their pre-existing beliefs. We’ve seen quite a lot of confirmation bias in the wake of Carillion’s belly flop into liquidation this week.

For some on the left this is all confirmation that privatisation of the provision of public services has been a disaster. It shows that corporate fat cats can walk away with profits while ordinary workers and small firms suffer, public services are put in jeopardy and taxpayers foot the bill.

For some on the right, on the other hand, it confirms that privatisation is working broadly as it should. A badly-run private company failed. Its contracts will now be re-distributed to other, more competent, private firms. As for profiteering at public expense, they see the precise opposite. If anything, civil servants have got too good at putting the squeeze on private contractors, forcing them into bidding wars which screw down their margins to almost nothing. Tough for the private companies, certainly, but it means better value for money for taxpayers.

Both sides should take a step back and remove the blinkers. It’s certainly welcome that Carillion’s shareholders and its lenders have not, despite intense corporate lobbying, been bailed out by the Government in the way banks were rescued in 2008. The shareholders will lose their shirts. And the banks must write-down their loans. That is how it ought to be. Leftist nationalisers ought to recognise that this represents progress.

But champions of privatisation should also face up to some unpalatable realities laid bare by this scandal. The profit margins of some contractors may be small but Carillion still managed to pay regular and substantial dividends to its shareholders, even when it was clear the company was financially overstretched.

And there have been high personal rewards for failed management. If these services had been managed “in-house”, no civil servant would have been paid the £1.5m a year that Richard Howson, the former chief executive of Carillion, commanded. The head of the NHS, Simon Stevens, by comparison, earns £190,000 a year. Are we really to believe that more modestly paid civil servants would have been vastly less competent than Howson and his team at Carillion?

As for the idea that civil servants have morphed into hard-nosed contracting experts, that rather stretches credulity given the miserable history of Private Finance Initiative deals. Moreover, this adversarial image isn’t a particularly useful way to conceptualise the relationship between private contractors and the state when it comes to the delivery of public services.

This relationship is inherently different from a normal commercial transaction between two parties. It has to be a much closer (and ongoing) relationship because society cannot cope with even a brief interruption of supply of the services. Ministers can’t allow a prison to be unguarded, a hospital to go uncleaned, a school to be without catering, a care home to be shut down.

Commissioning a contractor to deliver a public service extremely cheaply is a false economy if that contractor runs the risk of financial collapse and the state will have to fork out to keep the show on the road, as it is now with Carillion’s contracts.

This reality was also demonstrated last year when the Transport Secretary allowed Virgin and Stagecoach to exit their East Coast rail franchise early, costing the state £2bn in foregone payments, after the operators discovered they were running at a loss. It was not wise for the Transport Department to have accepted such a high bid from the consortium in 2015, however good it looked at the time.

One clear lesson from Carillion’s demise is that much more public transparency over contractors’ books is needed, something the National Audit Office urged back in 2013. The Carillion fiasco demonstrates that it’s impossible to rely on the expertise, or perhaps integrity, of auditing firms to flag looming problems.

In the end, the broader privatisation versus nationalisation debate might be an unhelpful framing of the issue. Even if many more services are managed in-house, as Labour wants, there will still be contracting out. Even Jeremy Corbyn is not demanding the nationalisation of construction firms.

When it comes to the delivery of vital public services, there is an unavoidable symbiosis between the state sector and the private sector. There is no purity to be found. The key question, which is too little addressed, is the appropriate balance of authority in that relationship and the institutional checks on that authority to ensure the broad public interest is always paramount.

#Carillion #confirmationbias #nationalisation #privatisation