Andrea Leadsom.

After listening to her speech this morning I am truly horrified at the direction this country is headed. She claims that the forecasts of economic doom and gloom were proven incorrect, I would like to know how?

Sterling: A devastating collapse to below $1.30 and at its lowest level for more than 30 years, plumbing depths not even see during the height of the financial crisis after the collapse of Lehman Brothers. During the financial crisis the pound did suffer a pronounced fall and this did not lead to the prosperity and export-led growth that Mrs. Leadsom now insists we will enjoy. The reason for this is simply, much of what we manufacture requires inputs that cannot be sourced from this country and are traded in dollars. Say for example we are building something that requires oil, fuel or rare earth metals all of these are not produced in sufficient quantities in this country and must be imported. This means that the input costs for many types of manufacturing rise which offsets any boost that would have occurred from the fall in exchange. The fall in the exchange essentially has the effect of making labour sourced in this country relatively cheaper but making the foreign sourced inputs relatively more expensive. As manufacturing in the UK these days tends to be very high tech and dependent on machines and foreign inputs the effect of falling relative labour costs is far outweighed by the rise in input costs and does little to help our global competitiveness. Another major problem we will see with the fall in Sterling in the medium term is increased food prices, especially for those that sourced entirely from foreign countries. Along with rising fuel costs this will significantly erode the buying power of consumers in this country and negatively effect living standards. Remember the 5% inflation we saw a few years ago? That was caused by a weak pound.

The stock market: Yes technically the FTSE 100 has risen by 3% since the result but this must not be taken out of context. In dollar terms the index is down by more than 10% and this is significant as a lot of investors in the FTSE 100 are foreign and therefore a lower exchange rate benefits them. Also this index is made up largely of companies who do not have a significant portion of their operations in the UK and are not reliant on the UK for most of their profits. Looking at the FTSE 250, much more UK focussed, or even just the financial stocks in both indices and the picture is far worse. It is down by just shy of 10% since the result and by more like 20% in dollar terms. This is is significant because many pension schemes will be tied to the stock market and such a fall will have created a sizeable black hole in many schemes forcing companies to scale back investment and use profits to fill the gap rather than to improve productivity and innovate for the future.

Interest rates: We really have reached the limits of conventional monetary policy. Any further cuts in the interest rate or additional rounds of QE will simply force yields lower. The government being able to borrow at 0.8% may seem like a good thing but it really isn’t. This erodes returns for pension funds and for insurance funds meaning that pension deficits grow and insurers are forced to charge higher premiums. As stated above this will have a significant impact on the economy and reduce our potential for economic growth well into the future. It will also make us even more reliant on debt and perfectly recreate the disastrous conditions that lead to the crash in 2008/09.

As someone who could quite possibly be the future prime minister and who has a background in finance I would expect these consequences to appear clear as day to Mrs. Leadsom. The fact that they haven’t, or that she has chosen to ignore them and try and spin the facts in her favour is deeply troublesome. I truly do worry for the future of the United Kingdom and I honestly believe that more than anything the referendum was an exercise in stupidity and ignorance beyond belief rather than the exercise of democracy that so many pro-brexit campaigners would like people to so naively believe.

Businesses prepare legal challenge over Brexit negotiations - FT.com

So there is hope. This article reinforces the view I have outlined in several recent posts that only after a parliamentary vote, likely preceded by a general election, should the country be taken out of the EU.

Policy Goals (4): The NHS Part II

Further to my recent post on the NHS [Available here: http://the-politician.tumblr.com/post/146572911223/policy-goals1-nhs] I have laid out in greater detail how I would suggest we reform the healthcare system.

The NHS is one of Britain’s most prized possessions and for that reason the subject of reform to our healthcare system is often seen as taboo for politicians. The fact is that after 70 years, the NHS has become outdated and the demand for healthcare has increased beyond anything that could have been predicted in 1948. Since that time the pensioner population has increased ceaselessly and this places a huge strain on the system. Advances in technology place an even greater strain on the system; MRI’s and CT scans were not around in 1948 and therefore the NHS could not have offered them whether it had wanted to or not. Now the NHS has an obligation to offer the most advanced medical technology to the public, this places an ever increasing financial burden on the service.

According to the OECD, in 2012 the UK spent just 9.3% of GDP on healthcare – this is a figure which includes a sizeable amount of private healthcare spending. It is also a figure which does not comparable particularly favourably with our counterparts in Western Europe; Germany, France and the Netherlands all spent between 11-12% of GDP on healthcare in the same period. How can the UK expect to compete on the international stage with spending that is not even in the same ballpark? The question then arises, how can the UK increase public spending so that healthcare spending was analogous with our European peers? In practical terms it cannot, this would require large increases in the level of taxation within the economy and this cannot be a burden that is simply laden on the shoulders of high earners. The scale of funding required to bring the UK into line with international standards would mean that simply increasing the top rate of income tax would be insufficient. The proposals laid out below are what I suggest the government should implement in order to ensure a high standard of healthcare is provided in the coming decades.

- The retention of healthcare that is free at the point of use for anyone under the age of 18 or in full time education.
- Compulsory private healthcare insurance for everyone above the age of 18, or persons no longer in full time education. The obligation would be for a safe minimum level of cover above that people can add additional cover, athletes could opt for physio cover for example.
- The set-up of a state-run insurance provider to compete in the private market in order to regulate and influence the market and prevent the exploitation of the public.
- Means-tested assistance available on a sliding scale to those on low incomes with the unemployed receiving a safe minimum level of cover along with their benefits.
- Premiums for pensioners capped to prevent market failure, this could be done by the state guaranteeing medical costs over £2500 in a year, with the first £2500 being paid by the person’s insurer.
- Allow any income spent on healthcare to be tax deductible up to a certain amount each year, this is to encourage people to choose the right level of cover and prevent the rich from benefitting disproportionately from this system.
There are many benefits to implementing such a system. Firstly, the pressure on public finance would be eased and there would be room for a reallocation of government funds to other areas. Secondly, the provision of healthcare would improve, there would be greater funding available to healthcare system and people would benefit as a result. It is also a fair system, it would mean those who use the healthcare system the most would pay the most while also protecting the most vulnerable groups in society, i.e. children, pensioners and the unemployed. It would also discourage excessive drinking and smoking as people partaking in these activities would see their premiums rise. It would be an explicit reminder of both the burden these activities place on the body and the strain it can cause to a persons finances. Reducing the participation in these activities among the population of these activities would have major social benefits. Further benefits of this system include that it would discourage abuse or misuse of the system. People would make more of an effort to make it to their GP appointments if they knew that everything they did was in some way effecting their premiums. We would also see an end to needless A&E visits, allowing the service to prioritize resources to where they are really required.

The money held by insurance funds would also increase and this would have positive ramifications for the economy. Insurance funds, along with pension funds, provide funds for investment and by increasing the level of these funds the level of investment within the economy will also rise, setting the stage for a higher level of sustainable growth.

It would be interesting to see the general response to this, it is obviously a controversial proposal but when taken on the facts alone it provides a convincing argument.

Six maps that will make you rethink the world - The Washington Post

I found this article very interesting and I think it really highlights the way in which globalisation is redefining what is meant by an international border. I personally believe that as globalisation progresses international borders will continue to diminish in significance and we will see a more inter connected world and that this will necessitate a change in the way we currently administer nation states and regions within countries.

It is such a shame that the UK has chosen to take a step back from the world and exclude itself from this process. We can only stand to lose in the long run.

Credit Suisse CEO blames Brexit on low UK education spending | Reuters

Interesting article highlighting the impact of education and inequality on the wider economy. An in depth piece on my view of our education system is linked below:

http://the-politician.tumblr.com/post/122250151663/qa-tax-credits-explained

Productivity, Investment and Green Energy.

the-politician:

In a recent post, I argued the economic case for green energy (link below) and the implications that going green would have on the wider economy. These implications were largely a result of increased investment and falling energy prices providing a boost to incomes across the board. I am writing this feature because I feel that I did not go deep enough in my explanation of this point.

As stated in the feature on green energy, the price of generating solar power has fallen significantly in recent years and is now comparable to many traditional sources of energy. For example in Germany, which has taken a lead on solar power in Europe, solar power is sold for around 9 cents. This compares with 5-10 cents for power produced in gas fired stations, the price varying on location and plant size, and 11 cents for nuclear. Although rates have been coming down in the UK, the current price is 13.39 pence compared with an average of 10-11p for other forms of electricity. These figures highlight two issues; UK energy costs are significantly higher than in Germany once the exchange rate is taken into consideration and that the UK market has yet to drive down the cost of solar by as much as the German market. The second point is easy to explain, Germany has a far greater capacity for solar power and solar accounts for over 6% of energy consumed there compared to just 1.3% in the UK. Germany is able to benefit from economies of scale that the UK market is not yet able to due to its limited size. The fact that energy costs in general are higher than in Germany is harder to explain, it largely comes from years of underinvestment in infrastructure and a growing reliance on imported fuel.

Lack of investment is a key factor in the UK’s poor productivity performance over the course of the last decade and particularly since the recession. Since 2010 average investment across the G7 has been 20% of GDP, during the same period in the UK average investment was just 14%. The UK has a depreciation rate of 11% of GDP, which means that 11% of the 14% of GDP that we invest in our economy goes on simply replacing old machinery etc. and does not lead to an increase in the capital stock. When population growth is also taken into account this means that there is little room left to increase the capital stock relative to the size of the population, increasing the capital to labour ratio is key to securing productivity gains and economic growth. Without productivity growth, the only way to generate economic growth is to add to labour force; the increasing labour force participation rate and growing population have been the main drivers of economic growth in the UK since the recession. Productivity growth, or lack thereof, can explain why wages have been so sluggish in recent years and why GDP per capita is yet to recover. Wages are linked to the productivity of labour and if the productivity of labour does not increase then increasing wages would cost firms money and reduce profitability. Reduced profitability would, in turn, lead to further reductions in investment and we would be locked in a vicious downward spiral.

The solution to this is relatively simple, investment needs to be encouraged in order increase productivity and wages. Only in this way can a long-term, sustainable recovery be achieved. This is where green energy becomes significant, by legislating to make the installation of solar panels on all new build houses the government can stimulate private investment. This would have the effect of making new houses slightly more expensive to purchase but it would also make them cheaper to own, the inhabitants are unlikely to have purchase electricity from the grid in anything other than very small amounts. The solar panels would also be cheaper to install when the house is in the construction phase. It would not only be the purchasers of the new builds benefitting but the entire market, by reducing demand for electricity from the grid producers will have to drop prices.
The government should also do more to encourage investment in solar power on an industrial scale as this would lead to economies of scale and help to further reduce the cost of energy. Reducing energy costs through this kind of investment is a two-pronged attack on productivity; the direct effect is to increase the productivity of businesses by reducing their operating costs, especially in manufacturing where energy bills are likely to be of more significance. The indirect effect is to make business investment more attractive in the UK, with lower operating costs as a result of lower energy costs competitiveness can be restored and this would increase the prospects of exporters, encouraging them to invest in expanding production. The way in which this stimulates investment is also likely to lead to a rebalancing of the economy as these factors are more significant for manufacturing and exporting firms, our dependence on domestic consumerism for growth will be reduced.

The above is merely a brief summary of a complex argument and represents just one way in which the UK could return to productivity growth. Anything the UK government can do to increase investment within the economy would be a positive thing and would likely boost productivity. Low investment is the problem here; London, which is the destination for much of the FDI that the UK receives, has a level of productivity better than the rest of the G7 save for the U.S. where the size of the domestic market allows for economies of scale that are unattainable in the UK. Investment in infrastructure is key, in the North in particular, and this is why HS2 is also of great significance.

Link to previous post on Green Energy: http://thepolonymous.tumblr.com/post/118939320888/the-case-for-going-green

I dug up this old post as I thought it follows on from my recent post on investment and economic growth in the wake of Brexit rather nicely.

NHS England medical director fiercely defends overseas staff | Society | The Guardian

This article highlights how immigration has been a source of strength for our NHS and not a burden on it. I hope that those who voted leave read this and seriously consider what they voted for. I would rather have hard working migrant doctors in my country than unskilled, uneducated lazy British people living off benefits.

The Governor's Weapons To Fight EU Vote Chaos

This article highlights in relatively simple terms the monetary policy options open to the BoE in the wake of the Brexit vote, in summary very few and none that can produce anything like the stimulus we saw back in 2008/2009.

UK current account gap remained near record high before EU vote

This article highlights just how dire the situation really is with our current account at the moment. In combination with the government’s budget deficit, this leaves us totally at the mercy of foreign investors. For this reason the Brexit vote was disastrous, for this reason we saw our government’s credit rating downgraded and for this reason we need to act. In a recent post I outlined what action I believe the government should take immediately in the wake of the Brexit vote in order to dampen the effect of reduced foreign investment and rebalance our economy. If you are interested in reading this please click here:  http://the-politician.tumblr.com/post/146748996033/policy-goals-3-economic-growth-1-investment.

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