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UK growth accelerated in the fourth quarter of last year

The fourth quarter saw UK growth speed up to 0.7% for the three months. The quarterly pattern last year according to the ONS was 0.2% in Q1, 0.6% in each of Quarters 2 and 3, and 0.7% in Q4.  The ONS says this amounts to 1.8% growth for the year as a whole, though the four quarters as reported gives you a figure of 2.1%.  What is clear from these figures is the economy grew faster after the Brexit vote than before by a decent margin, the opposite of the official and expert forecasts at the time.

As the ONS rightly said “In the fourth quarter the UK experienced the strongest arte of growth among European groupings and G7 countries”. Let’s hope the Treasury adjust their forecasts for our economy in the Budget statement, as their recent forecasts have been far too low.

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Lords pass Brexit Bill unanimously

Parliament has now spoken. A large majority for Brexit in the Commons is now matched by a unanimous vote in the Lords.

The Supreme Court has succeeded in delaying the letter but not in stopping it. As I thought at the time of the discussions on the Supreme Court decision it is the view of Parliament we should send the letter. If it had not been Parliament would have said so and voted accordingly prior to the Court decision.

I expect the Lords to approve the Bill at third reading in a similar way. It would be odd indeed if they changed  their minds after yesterdays important vote.

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UK public finances are OK

The latest figures for public spending, tax revenue and borrowing published yesterday showed more progress in reducing the running deficit.  Total state borrowing adjusted for the bonds the Bank of England has bought in remains at a moderate level, around 65% of GDP.

The main reason new  borrowing is reducing is the continued good growth in tax receipts. In the period April 2016 to January 2017 tax revenues were 5% higher than in the same period of the previous financial year. This reflects the continued growth of the UK economy. Self assessment income tax receipts and corporation tax receipts showed especially strong growth based on improved business activity and investment prospects.

This increase in tax allowed an increase of 2% in public spending and a reduction in the rate of new borrowing. In the financial year to date central government current spending is up by 1.4% and local government current spending up by 10.2%.  Central government net investment rose by 6%.  (ONS official figures). There are some areas where it may be necessary to spend more.

It is still a good idea to spend  money wisely. Ending our EU contributions  is an obvious improvement to make. There are issues with poor value for money in parts of the overseas aid budget. There are  more opportunities to help people into work, to cut the benefit bill by substituting earnings from work. There are many efficiency improvements to be made in areas like railway spending, which is running at high levels.

The government also  needs to be careful over tax rates. Taxing income may be a necessity, but it is not wise to tax working and investing too heavily as it can do considerable economic damage and prove self defeating. The budget is an ideal time to review current rates and ask which taxes should be lower in order to raise more revenue as and when economic growth delivers more cash.

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The future of the High Street

The changes to rates has once again highlighted the rapid changes on UK High Streets. Large centres with numerous coffee shops, restaurants, boutiques and the main multiples are usually trading successfully. The Metro Centre, Oxford Street, Bicester Village, Meadowhall and the other well established shopping centres are flourishing. People want a good range of shops, good brands, and the capacity to make a half day or a day of it with stops for food and drink. Big new shopping centres like Westfield are still being added, with the redevelopment of Birmingham Bullring and other leading City retail destinations.

In contrast many of the smaller High Streets are suffering from the attack of internet shopping offering keener prices, and destination shopping offering more choice. Many a small butcher, baker, fishmonger and green grocer has given up the struggle to compete with the volumes, prices and freshness of the leading supermarkets. In their turn the large supermarkets are under strong competitive pressure from the discounters, who target a narrower range of popular products so they can use their dominant volume in these items to command great prices from suppliers.

The advent of new or expanded and revamped destination shopping centres, and more space for the main discounters has intensified the bricks and mortar shopping competition. The large food retailers have added to the complexity of their tasks by opening a range of local smaller stores, seeking to tap into the narrow range essentials that many people buy daily or several times a week at a convenience store near their homes.

The changes to rate valuations seek to mirror the changing fortunes, but some think they throw up anomalies. The aim is to reduce or remove business rates from small independents, to cut the tax on those many shopping centres with falling revenues or weaker margins, whilst boosting the tax on the successful destination shopping areas. We will find out how successful this has been in the debate that has been unleashed by the new rating schedules.

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Major problems with overseas aid for Eastern European countries

I was surprised to read in the Sunday press that some people think it a good idea to divert overseas aid to Eastern European members of the EU to “buy” a better  deal with that organisation.

As I have explained before, there is no Treaty power to require a UK leaving payment above and beyond completing our annual payments to their budget for the period of  our continuing membership. Nor is it legal under WTO rules to pay for more favoured trade with a particular country or group of countries than the rest. Payment for trade under WTO rules takes the form of accepting tariffs, and these have to be limited to the current mfn schedules the EU has agreed.

The trade choice is for the rest of the EU to make.  The Uk would be quite happy to carry on tariff free. That will help the rest of the EU more than us. It would mean registering our current trade arrangements as a Free Trade Agreement at the WTO. Or we can trade under mfn arrangements under the WTO. Most of UK trade will be tariff free, whilst EU sales of agricultural products would suffer heavy tariffs into the UK. The UK could agree lower or no tariffs with other cheaper suppliers of food around the world through the WTO process. I have  said it is in the EU’s interest to accept the tariff free offer, and they may  do so after much huffing and puffing.  I have also always said that they might decide to harm themselves by accepting WTO terms instead. Under the general WTO arrangements the UK will be fine.

The overseas aid  idea also falls well foul of the overseas aid rules. The Eastern countries in the EU do not qualify for overseas aid under the international definition, as they are too well off. UK Ministers  by law have to hit the 0.7% Aid target under international definitions, so they could not switch this aid money to Eastern Europe unless they repealed the 0.7% requirement. It would not be easy to achieve repeal, given the likely fact that all the opposition parties would oppose repeal other than perhaps the one UKIP MP. The government might be able to persuade  enough Conservative MPs to get it through the Commons, but the Lords would be likely to have a big majority the other way. As it would not be a Manifesto pledge, and does not stem directly from a referendum, the Lords might become  very difficult.

In circumstances where the EU Commision and one or two large countries were  not wanting a free trade Agreement with the UK for political despite their interests in having one, it is difficult to see how offering to send money to Eastern countries would buy a change of heart.

 

 

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Business rates

The media have been running two popular causes in recent days. The campaigners want the government to spend more on social care. Campaigners also want no business rate rises in places where property prices have risen. This highlights the perpetual tension. How do you raise enough money for good purposes without overtaxing the people and businesses which generate so much of the national income?

Taxing work and enterprise is never a popular idea, nor helpful to promoting growth. It is a necessary evil as the country wants to have decent public services. The skill is how do you raise enough from those who earn the money without doing too much damage to enterprise?

The decision to  tax business property is commonplace around the world. The political difficulty in the UK comes from the need for periodic revaluations of properties. In the areas where these have risen a lot businesses face large increases in rates bills. In the areas where values have gone down other businesses benefit but are not so vocal about the changes.

Is this a good system for taxing  business? If you did not raise business rates, how would you replace the revenue?

I favour setting income and profits  tax rates that people and business will pay and can pay, to avoid too much damage to incentives and to keep business and enterprise at home.  I have no problem with the principle of business rates but would be interested in comments on the current levels.

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How the world is changing

The advent of Mr Trump on the world diplomatic scene is making some big changes.

Mr Trump has in many ways a very conventional US view of the world . He sees his main allies as the UK in Europe, Japan in the Far East, and Israel in the Middle East. He tells Israel he wants them to reach a settlement with the Palestinians, but he no longer insists on what that settlement might look like. He warns China on trade,and is friendly towards Taiwan. He  condemns the harsh words and warlike gestures  of North Korea. He is keen to tackle the persistent large trade surpluses run by China and Germany, which he sees as disrupting the world economy and fair commerce.  He wants a world of bilateral relations between nations, rather than complex diplomacy between jostling regional power blocs. The US has traditionally  been suspicious of international bodies taking too much power, and has often found itself in disagreement with the liberal consensus that tends to dominate in those institutions.

The biggest change he is proposing in US foreign policy is the reappraisal of the strength and helpfulness of the EU. Where Mr Obama saw the EU as a benign force, and looked to Mrs Merkel to be his best ally in return for his support for the supranational body, Mr Trump is concerned. He sees the dangers of an inadequately resourced European defence activity that weakens NATO further but still expects US military capacity to be the guarantor of the peace. He is concerned about the low level of the Euro allowing Germany to build a colossal export surplus. He sees how the current level of EU integration is creating a force against it in rising independence movements around the continent. He is doubtless not impressed that the IMF has run up large bills lending to the weaker member states of the Eurozone, when the zone overall is rich enough to  be able to handle its own financing.

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UK retail sales up 4.6% in volume and value (excluding motor fuel)

The figures for the last three months compared to a year earlier still show good growth and no retail price inflation, with both volume and value figures up 4.6%. Add in motor fuel where oil prices have soared and volume growth is 3.8%.

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How I am a good European

One of my main arguments for the UK to leave the EU was to allow the rest of the members to complete their union free from the UK seeking to hold them back. Anyone looking at the state of the Eurozone can see that the poorer parts of the zone need larger financial transfers from the richer parts. The way the system works at the moment is through the so called Target 2 balances. The latest figures show that Germany now has a huge  deposit of Euro 796 billion with the European Central Bank. This is lent out interest free for as long as it is needed to the large deficit countries. Italy, Spain, Greece and Portugal are the main beneficiaries.  In a normal currency Union the equivalent region to Germany would simply send more grants to the parts of the Union needing more money. These balances may well become an important part of the German election debate over how much money Germany should share with the rest of the Union, and how that should be organised.

 

David Cameron felt he had to keep the UK out of the Fiscal treaty that wanted to start to address this issue. The UK always made clear as a member it did not wish to see a bigger EU budget and did not wish to send more of its cash to the poorer high unemployment regions of the south of the Eurozone. The rest of the EU with the possible exception of a few richer Northern countries did want a growing budget with more solidarity recognised in higher transfer payments.  It was increasingly difficult to be in the EU but not be in the Euro, the central feature of the EU. The UK was also reluctant to work on a European defence identity or common armed forces, was out of the Schengen common borders and an opponent of the planned political Union with an EU Treasury and more common taxation. The UK public had always been told the EU was just a glorified free trade area which should  be good for our exports. In practice it was a customs Union with many and growing features of a full economic, monetary and political union, which was better  for their exports to us. It stopped us having free trade agreements with many other parts of the world.

 

One of the strange things about the UK debate since the decision to leave is the wish of some  to argue both that the UK will lose out badly from leaving, and that we have to be punished to make sure we do lose out. The Commission and some in other member states who keep on saying they need to demonstrate we will lose from departure argue a contradiction. If, as they say, belonging is such good news, leaving is punishment enough. If, as they imply, belonging is such bad news, then of course they need to replicate as many of the undesirable features of  belonging as they can on the departing state to stop it doing better! It makes it a highly negative approach. Pessimism rules, and a few  suggest revenge is  their favourite dish. They will of course discover revenge is a boomerang. They cannot hurt us because we are shaking off their controls but they can hurt themselves by imposing high tariffs on their agricultural exports to us and higher taxes to make up for our lost contributions. They should also remember that their own Treaty makes it clear they have a legal obligation to get on well with a  neighbouring state and to trade with it.

 

I find the delay in the EU acknowledging that all UK citizens legally settled in the rest of the EU can stay there is shocking. Surely these officials and politicians understand that no decent country expels legally settled law abiding citizens from its jurisdiction?  The UK has no wish to  expel EU citizens legally here in the UK. What is holding  back the rest of the EU saying the same? This should not  be a negotiation. This is not something the UK wants and has to pay for.  This is just basic decency, and international law.

 

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  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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