Blog: March 2017
Why does long growth or what economists used to call secular trend matter? It is essentially about compound interest. At a growth rate of 2% per year, income will double every 35 years. Over the 315 years from 1700 to 2015 in the UK we have reasonable or passable data for Britain stating that income has grown at an average rate of 1.69%, which implies a nearly two hundred-fold increase in income (widget production) over this long period.
Article 50 may lead to a decisive fork in the road for the UK. The final Brexit agreement “must take account of the framework for its [the UK’s] future relationship with the EU.” Therefore, the government has two years, realistically eighteen months, to redefine our international relationships. These relationships have a direct correspondence on our economy, creating winners and losers. The government may have to choose between two very different paths.
The UK has often been described as being an economically divided country. Initially this divide was related to the decline of traditional primary (for example, mining) and secondary (manufacturing) industries and the rise of the service sector in London, which increasingly provided legal, financial, accounting and educational services to the rest of the world. Oddly enough both sets of industries, whether in decline or still growing by the late 20th century, had strong roots in the industrial revolution. This simple observation tells us that we cannot know today which sorts of industries will necessarily thrive into the 21st century: Hoxton hipsters making furniture might dominate the pricing of credit default swaps.
First let's ask what explains household debt? Well if the household formulates a rational plan that conditions on its lifetime budget constraint, over its lifetime debt should be zero. With many overlapping households we might expect to observe debt in a young economy when the proportion of young outweighs the old.
Brexit need not have led to a second Scottish referendum. But the UK Government’s policy of ever harder Brexit, without so much as a vote, raises issues of political legitimacy north of the border. The Scottish Government faces daunting economic hurdles to convince its electorate. But if we have learned one thing over the last year, the feeling of exclusion can override economic logic.
The resilience of output following the referendum has been most welcome and has led to many forecasters gradually cranking up their central views for 2017. On Wednesday, the OBR plumped for a central case of 2% this year compared to 1.4% in November. The Institute itself also published an upward revision in February and thought that output would be most likely to grow by some 1.7% this year. But it is the composition of that growth and the risks present a great concern.
For the last several budgets/autumn statements I have agreed to write an immediate response for some media outlet, and have therefore felt obliged to watch either the speech itself, or the media reports on the day. The good news is that no one has asked this year, and so I can ignore all budget coverage until tomorrow.
In the week before the Spring budget, we are all supposed to get excited about the odd change in tax rates or the TV license fee. And worry about the excise duties on various viscous hydrocarbons. In fact, what we ought to be worried about will probably mostly be missed by commentators: that is whether the government is meeting its obligation to reduce risk.