Each New Year the Financial Times surveys a select group of policymakers, academics and commentators to gauge views on some important questions for the economy for the coming year. Volterra associate Nick Bosanquet took part in the survey in 2013. Read the full artticle published in the FT here – and take a look at Nick’s responses below:
1 – Economy: To what extent will the UK see a sustained economic recovery in 2013?
The recovery will be weak –around the consensus growth forecasts of 1%. Growth depends on competition and entry of new producers—the 1980s recovery was driven by deregulation in airlines , telecoms and utilities which brought in new entrants. The 1930s recovery was about a radio boom and housing. This time the response from policy and agent decisions at all levels has been highly defensive. This type of recession has strengthened oligopoly forces so we have a return to stagflation.
2 – Credit: How realistic are concerns that a credit crunch can explain the UK’s plight since 2010?
Do the banks need to be recapitalised? And will taxpayers need to pay? The credit crunch has had perverse effects in supporting weak firms with low interest payments while denying credit to those firms which aim to expand. The banks should sort themselves out and any that cannot do this without taxpayer help should be taken over by new entrants. The FSA has been extremely slow in promoting greater competition.
3 – Fiscal policy: To what extent will George Osborne be able to keep “Plan A” in operation for another year? Should he?
Fiscal policy makers have yet to recognize the extent of drag from changes in the balance of the tax system. From 2012-13-2016-17 OBR forecasts are that revenue from income tax and NICs will increase 23%, from VAT 15% Corporation tax 9% and Tobacco duty 8%. For more active citizens who gain higher earnings and promotion there will be a move into higher rate tax paying. The combined effects of continuing inflation and rising tax rates will lead to economic stagnation. Plan A is the minimum .We need to add a strategy for tax reform. For the longer term we need a strategy both for lowering tax and for shifting taxes towards consumption by broadening the VAT base. The tax system as it stands is producing a greater imbalance between the generations. Young workers and those with rising earnings over the life cycle pay income tax—the affluent elderly do not—but they would pay consumption taxes.
4 – Monetary Policy: Will the Treasury change the Bank of England monetary policy remit? Should it?
We need a phased move towards more positive interest rates—to give more reward for risk taking and a return to saving. Successful economies do not have zero interest rates.
5 – Labour market and productivity: For how long can rising employment remain consistent with stagnant output. What might give in 2013?
Most of the new employment has been by older workers in service industries. Some of the biggest increase has been in coffee bars and catering. The larger initial tax allowance has certainly helped here together with the fact that workers post retirement do not pay NICs. This kind of employment growth is stable and is welcome—but employment growth in making bacon sandwiches is not enough for economic success. We need to promote growth of high productivity jobs in manufacturing ,in creative arts and other areas which will surprise us—not possible to pick in advance. —the future Dysons and Harry Potters. (J.K Rowling has made the biggest individual contribution to UK economic growth over the last 10 years.) Over the past four years labour productivity has fallen 15 per cent—again this is not found in an economy with good long-term growth prospects.
6 – Europe: As far as the economics are concerned, how much should people worry that Britain might leave the European Union in the years ahead?
We have never really been in Europe so we will remain in limbo. In fact the two speed euro/non euro EU which is emerging could give us new opportunities. We should build alliances with pro-market countries outside the Euro. The case for remaining in on this basis needs to be made much more strongly—Euro policy is currently made by the headbangers of Harwich.
7 – Housing: To what extent are house prices still too high?
House prices reflect market forces. On the supply side there is price rigidity for a once in a lifetime transaction. On the demand side there is a lack of mortgage funding. The shortage of funding is bizarre given that UK house mortgages have been one of the world’s safest investments over the last 80 years— it reflects oligopoly stagnation. Over the next year transactions should pick up as there is a limit to how far some can be postponed—job movement, inheritance etc. The long term losers are the younger generation—they are renting and with each year it becomes more difficult to buy. Rising housing equity which has helped so many in the past will not be automatic in the future.