Conservative orthodoxy on picking business ‘winners’ must change

James Willby

I’ve often listened incredulously to otherwise sensible Conservatives opposing the idea that Government should pick winners. The topic seems to cause consternation in many right-leaning circles. “Invest public money in companies? Pick winners? What is this: Cuba?!” they cry. What would you prefer, I ask them. That we pick losers? Cue more consternation and a reiteration of the fact its taxpayers’ money being invested. How is that in any way different to what a pension fund or banks does, I enquire. Why are you happy with commercial entities investing your money for a return, but not elected representatives using it to produce growth and jobs?

Needless to say its not a particularly well received notion – akin to being pro-EU – but as a rather brave Conservative confided to me recently, the words “industrial strategy” should not be a taboo for someone on the right.

If our aim is to get Britain back on its feet, it is utterly nonsensical to write-off a potential avenue of endeavor. Forget being economic Meatloafs – protesting how we’d do anything for growth, but we won’t do that – lets be fiscal Roy Orbisons and give business the Big O it deserves: anything it wants, anything it needs, it gets it, and sometimes that means doing what up until now has been utter heresy for many in the Conservative rank and file. It’s time to become proactive about identifying the industries of the future and giving them a leg-up, or more succinctly, pick some winners.

And yet unbeknownst to the party at large, that is exactly what the leadership has been doing.

In 2009 at the annual CBI conference, George Osborne was heard to lament the fact that the then Labour government had not conducted a single trade mission to sell British goods overseas. Since taking office in 2010, this has been completely reversed. Take the Prime Minister’s trade mission to China last week. In addition to ministers, ambassadors, and civil servants on the trip, there were a host of men and women from across British business. Yes, there were the Jaguar Land Rovers and the Rolls Royce’s, but there were also SMEs from across the UK. From food manufacturers to retailers, they encompassed an incredibly diverse range of fields. They were there because they showcase the best of British – being innovative, creative and dynamic. And they were there because they recognized the opportunity they were being afforded.

Do you think these SMEs could ever have secured access to China, the world’s largest economy, without the help of Her Majesty’s Government? No local business conference or trade show could possibly give them the opportunity that trip afforded. If that isn’t “picking winners”, I don’t what is. Further afield, we’ve seen the State investing in graphene, “quantum technology” (don’t laugh), giving tax breaks to video games and creating an office of unconventional gas to help monetise shale. These are all examples of the State seeing the growth potential in a technology and wisely choosing to invest.

So we do pick winners, we should pick winners and it’s about time we had the guts to say so. As GK Chesterton observed, “I did try to found a little heresy of my own; and when I had put the last touches to it, I discovered that it was orthodoxy.” Amen to that.

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Where is Osborne’s ‘March of the Makers’?

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George Smith

During a recession the temptation for the government is understandably to find GDP growth from anywhere, even if that means ignoring emerging long-term trends as something we can tackle when the economy is stronger. Especially approaching an election, it can be seen as decadent to believe that we economic ‘beggars’ should also try to be ‘choosers’ over what type of economic growth we desire.

However, as a child of Thatcher, what I always admired about the Iron Lady was that even in the darkest economic times, she was willing to not just go after the low hanging fruit of economic growth, but risk more pain in order to pursue the right long-term trajectory for the UK economy.

It is for this reason that the recently announced 0.6% growth in Q2 and the continued fall in unemployment, whilst undoubtedly positive in the short-term, is not unalloyed good news in the long term. Specifically the much talked about rebalancing of the economy to manufacturing and exports is just not happening.

I greatly enjoyed Mr Osborne’s proud declaration in 2011 that his Conservative-led recovery would herald “a march of the makers”. This is not because of some banal grudge at the financial services sector, or a desire to return to a promised golden age when Britain made things. The need to focus on long-term growth in manufacturing is due to the effect of the digital revolution on middleman services like retail.

I was reminded of this recently when I read the speech by Sir Martin Sorrell at last month’s WWP event ‘The Future of Retail. Sir Martin compared the impact of ecommerce on the retail sector to it’s recent devastation of industries like music and newspapers. Those content providing industries had existed as essential middlemen in the pre-digital age, brokering relationships between content creators and content consumers. However just as the UK consumer no longer needs HMV to find its music, or Blockbusters to acquire the latest movies, so all retailers are under threat because their position as essential middlemen for creators and manufacturers is no longer required.

In a world where P&G is selling 75% of its nappies online and direct to consumer and even my dad has his own eBay shop, it is not clear to me that most manufacturers will need retailers in the future to reach consumers. Over recent decades many western economies have profited from high-margin ‘value added’ services like retail, where products have been manufactured abroad in low-cost countries, but sold to a local western market through British retailers who profit from the scarcity of physical high-street stores. So whilst competition on the high-street was fierce, prices were higher due to the need to have a british based retailer with a physical location, but digital technology and ecommerce changes all that.

HMV was one of the early casualties of ‘Showrooming’ the term used to describe the common act of customers browsing their in-store stock of music, games and DVDs, only to then purchase the item cheaper on Amazon, eBay or other online providers. With a recent report estimating that 63% of smartphone owners check prices online while in-store this trend for ‘Showrooming’ is set to only get worse for retailers. Whereas once high-street retailers could demand a high-margin profit because they owned the physical stores, now these physical retail spaces are the deadweight overhead that is destroying their cost model.

In the years to come the Left will inevitably argue for the protectionist measures required to ‘Save our high street’ but not only does economic protectionism not work, it will be impossible in this case because the internet is a global market, not a British one.

The naysayers will argue that British manufacturers cannot compete on price with low-wage countries like China, but this is also to miss the awesome potential of technologies like Additive printing (a.k.a. 3D printing) which will turn manufacturers away form needing to ‘own the means of production’ and increasingly towards ‘value-adding’ design, innovation and creative skills.

The UK with its creative, educated and high-cost workforce can dominate global manufacturing if it has the vision to recognise that when our economy recovers from this current recession it will be existing in a reality that has been reshaped by another industrial revolution.  Hence the future will not look like the past and if Britain grabs just any economic growth on offer instead of trying to rebalance the economy towards manufacturing and exports then it will be the ‘march of foreign makers’ that trample over this nation of shop-keepers.

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Growth, expectations, and confidence are all on the rise

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Daniel Cowdrill

It’s all about confidence.

The importance of ‘confidence’ in economics was articulated in The General Theory by John Maynard Keynes. He set out what he termed the ‘marginal efficiency of investment’, or the expected return on investments. As it is difficult for individuals to rationally calculate future returns, ‘confidence’ becomes a key factor in investment decisions.

In the debate that raged over austerity, it was argued that reducing public spending when the economy was fragile would damage confidence. In an interview, the economist Paul Krugman predicted that austerity would fail to instill confidence and condemn the economy to an “endless slump”.

A string of positive economic results, culminating in a 0.6% expansion in second quarter GDP, has made the arguments of critics like Krugman less plausible. They perhaps failed to take full account of the context surrounding the Coalition’s deficit reduction plan.

In May 2010 the UK was running a public sector borrowing requirement of over 11% of GDP. This was an unprecedented figure and part of rising defictis across the West. Bond yields rose dramatically across the Euro zone with financial bailouts being sought by Greece, Ireland, Portugal, and the economies of Spain and Italy facing significant pressure. 

The Government was therefore right to secure the medium-term trajectory of the public finances to increase confidence in the near term. To do this the other way round, to try to build confidence before consolidating the public finances, would have been like building on quick sand. Fortunately, it also placed the UK ahead of the curve in Europe.

When Moody’s and Fitch downgraded the UK’s triple A, Osborne was widely criticised for placing too much emphasis on defending it. However, we arguably retained the Triple A long enough to make its eventual loss less damaging. It should be noted that we still retain three As with one of the major credit agencies.

Businesses have therefore enjoyed a relatively benign environment in which low interest rates have stimulated growth, and in which the main banks have had time to improve their capital positions. It has also given the Government some latitude in terms of the scale of cuts, and in terms of the public debt target which has been postponed without unnerving the markets. 

It is a little known fact that the Great Depression in Britain was not as bad as it was in the United States. In fact, after a period of austerity, Britain enjoyed steady growth through the 1930s. In 1934, Neville Chamberlain was able to tell the Commons, “We have now finished the story of Bleak House and are sitting down this afternoon to enjoy the first chapter of Great Expectations.” 

It is premature to say the same, but for now we have rising expectations and renewed confidence. This in itself, is no mean feat.

Hello Grayness, My Old Friend…

Louis Reynolds

The recent rumours of Philip Hammond’s leadership ambitions have brought renewed (and perhaps unfamiliar) attention to the Secretary of State for Defence and his accomplishments since his appointment in October 2011. Yet Hammond’s tenure is a difficult one to judge, not least because of the fact that to him more than any other minister an enduring political truth applies:

Ministers are not omnipotent.

The final Minister of Defence and first Secretary of State for Defence, Peter Thorneycroft, not only played a major role in the most significant post-war reorganisation of Britain’s defence apparatus, but also contributed heavily to the development of the nuclear policy of the United Kingdom and NATO as a wider whole. Yet while Thorneycroft was an intelligent and ambitious man, his tenure in charge of British defence policy was shaped largely by forces outside of his control. Unforgiving economic necessity brought forth the Mountbatten-Thorneycroft reforms, seismic developments in the global political landscape drove the hasty advancement of British nuclear policy and acute political embarrassment forced through the establishment of the UK Polaris programme.

The myth of the Minister as the master of a department’s destiny obscures the more nuanced truth. Events, expediency, context and any number of other unseen forces conspire to steal direction away from Ministerial agency.  As was the case with the dramatic tenure of Peter Thorneycroft, so it is with the perhaps equally historical if less vivid stewardship of Philip Hammond.

Hammond was perhaps created for the role he currently performs; a fiscal golem to carry out the unforgiving cuts that political necessity has forced upon the Ministry of Defence. A competent, prudent administrator, it is fair to say that before Liam Fox’s fall from grace Hammond had been characterised by quiet efficiency. Andrew Grimson recently opined, with regards to the rumours of Hammond’s leadership ambitions, that it would be far easier to see Hammond as an able Chancellor than a Prime Minister. Certainly Hammond has not captured the hearts of the people, being apparently easily confused with Julian Assange in the eyes of the general public.

But what can be expected? Hammond’s job has been to downsize the MOD significantly, and the scale and grim nature of the task drains both popular-political capital and attention from other endeavours. Moreover Hammond, despite recent and much misunderstood protest, is guided (or dragged along) by the weighty hand of the Chancellor, and perhaps more importantly the internal dynamics of the Coalition. All the significant facets of recent military reform have been shaped almost wholly by fiscal requirement. Surely no one can seriously contend that Future Force 2020, under which not-yet-fully-existent TA soldiers will perform critical front-line duties to make up for a dearth of full-time professionals, does anything but critically undermine British capability to save a few billion in the short term?

If Hammond is necessarily more a Chief Financial Officer than a visionary Minister, he performs admirably in that function. His planned reforms to the defence procurement system are long-overdue and bold, while the cuts already undertaken have been managed well and applied intelligently. The foundations laid by Liam Fox can be regarded as critical to the overall process of bringing martial law to Britain’s belligerent defence ledgers, but it was Hammond who in 2012 presided over the first balanced MOD budget in a decade.

The context of Hammond’s career as Secretary of State for Defence has been the Government’s policy of drastic reductions in state spending, and the accompanying reality has been the ring-fencing of large sections of the overall budget, as well as the spirited defence of Welfare by the Liberal Democrats. Controversial cuts to Defence have been the result, and financial pressures have, in the eyes of the Coalition, trumped military requirements. In such a situation expediency requires a loyal, competent, financially astute and trustworthy manager to preside over a difficult department. All the better that such a man, with an awkward and potentially volatile brief, be rather grey.

In other Governments and in other decades, he might have been unsuitable. When Philip Hammond was first appointed as Secretary of State for Defence, Aaron Ellis criticised the decision in these pages and suggested a number of alternative candidates, many of whom would have represented excellent choices if the role had been that of a conventional Secretary of State rather than that which Hammond has fulfilled.

Hammond, more than the distracting and sometimes awkward Thorneycroft, was truly built to meet the needs of his government and of the realities that have confronted him. Hammond has so far played a very straight role from a position of much less power and influence than is often assumed. Serious rebellion against the further MOD cuts was never a realistic prospect, and Hammond took on the task specifically in order to enforce them. Whether the policies that he has so ably carried out are in themselves in the interests of the United Kingdom is a wholly different matter.

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Self-defeating ritual of ever-higher beer duty must end

Nik Darlington 11.11am

Beer duty has bilged by more than 40 per cent in the past four years, which means when you buy that satisfying pint of ale in your local pub, around 190ml belongs to the taxman.

Meanwhile, more than 5,800 pubs have shut up shop since 2008 at a rate of eighteen per week. Quite frankly, it’s miserable, the sort of news to drive even the most abstemious to drink.

MPs, pub and brewing industry groups and campaigners have made a number of attempts in the past to quash the beer duty escalator, including a successful debate in the House of Commons last November, but to no avail. The Chancellor plans to go ahead with a further increase in next month’s Budget.

Another increase in beer duty would compound the folly of minimum unit pricing and put ever-more pricing pressure on pubs. There’s a semi-plausible argument from some publicans that MUP could chip away at some of the supermarkets’ competitiveness and send punters back through their doors. Yet any gains from that are surely offset by the pain in everyone’s pockets of a dearer pint.

There is a certain silver lining. Politicians have always tinkered with booze taxes, and we can be pleased that Mr Osborne doesn’t wish to follow the lead of his Liberal predecessor Sir William Vernon Harcourt, who in 1895 tried to balance the budget on the back of beer duty alone.

In that November debate, economic secretary to the Treasury, Sajid Javid, hinted that beer duty was simply too lucrative to freeze or reduce, garnering £35 million this year and £70 million the next. Furthermore, it’s Labour’s tax. True, but it would not be the first time this Government had reversed a fiscal act of the previous government.

One gets the feeling that there’s a moralistic streak at play, similar to that driving the MUP policy. I have no truck with being slightly moralistic about alcohol, which is as dangerous a substance as any if in the wrong hands, in the wrong volumes, at the wrong time.

Yet that is why further inflating the price of proper beer in pubs is so self-defeating. Surely it is reasonable to encourage the survival of pubs as focal points of the community, and relatively safe, secure and well-monitored drinking environments. You don’t have a publican withdrawing that second bottle of Buckfast as you slouch on your sofa on Wednesday morning.

So to finish up, register your support with the Mash Beer Tax launched today and request the Chancellor calls time on ever-higher beer prices in pubs.

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4G spectrum failure hardly surprising, but what is Ofcom playing at?

Nik Darlington 9.58am

When George Osborne said the Treasury would raise several billion pounds from the upcoming 4G auction, I along with many others feared (or even expected) that wouldn’t be the case. Some technical and financial reasons for why, but largely an informed hunch.

So it has come to pass. ‘Only’ £2.34 billion has been raised by Ofcom, despite the OBR’s forecast of £3.5 billion.

A couple of observations about the reporting of all this: first, £2.34 billion is still a useful fillip not to be sniffed at; and second, this mini embarrassment has given journalists a perfect excuse to ignore the good employment figures also released today.

Yet a mini embarrassment it is. Perhaps Mr Osborne should not have brandished an outcome ahead of time, but auctioneers tend to set target prices with little impact on bidding behaviour other than to focus it around said target. It isn’t a patch on Gordon Brown selling our gold reserves having already announced to the world his intention to do so.

On the subject of auctioneers, however, something odd happened on BBC Breakfast earlier today. Ed Richards, Ofcom’s chief executive and unsuccessful candidate for BBC director-general (despite being the bookies’ favourite), was on talking about the auction. Mr Richards stated that Ofcom’s priority - as auctioneers - was straightforwardly to hold a fair and proper auction and “ensure that a valuable economic resource was brought into productive commercial use”. Ofcom’s priority - as auctioneers - was certainly not to maximise revenue.

Whether or not this was on instruction from the Government doesn’t matter. It is still odd. Tell auctioneers at Christie’s that the whole point is just to shift stuff and not to maximise revenues, you’ll be laughed out of the room. These are, as Mr Richards also said, “very different times” compared to the 3G spectrum auction, which raised £22 billion in 2000. But it doesn’t mean you shouldn’t at least have a go at it.

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Gay marriage vote is very simple: forget the politics, vote for what you believe in

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Nik Darlington 8.42am

There is a lot for Tories - or even just any sensible observer of politics - to be unhappy about over the Government’s same-sex marriage reforms.

No mention in either Coalition parties’ 2010 manifestos. No mention in the Coalition Agreement. Neither perceived nor existential agitation for it from homosexual people or otherwise. Manifesto commitments pertaining to marriage - such as recognising marriage in the tax system - that probably ought to take priority.

So any sensible observer of politics (and there are many insensible observers giving voice) can understand why grassroots Tories are protesting and writing literally thousands of emails and letters to MPs, why there is talk of deselections, and why scores of Tory MPs intend to vote against the Bill today.

It is, therefore, an upsetting and destabilising time. One old-timer I consider to be largely sensible about these things phoned me up yesterday to bemoan politicians spending so much time fussing over it when there are more important matters at stake, whatever the merits of the policy itself (they were in favour of it). This is partially unfair, given that the Government is so sweatily ram-rodding the issue through Parliament (just one bone of contention). Though sensible observers could be forgiven for thinking this is all MPs have been doing lately, given the corybantic manner in which the media are covering it.

Yet these difficulties notwithstanding, there remains a simple, unalterable fact that for me - and I’m sure for many others - makes voting down this proposal impossible. David Cameron maybe should not have chosen this moment to pose the question. Though now the question is posed, I could not sensibly oppose it. We cannot ignore it, or wish it would go away.

It is said that some MPs couldn’t really care much for the policy, but believe the Prime Minister to have been a clod for pushing it and shall vote against (or abstain) to spite him. There are many who genuinely and deeply believe the policy to be inherently wrong - whether out of religious belief or traditional social mores. I am comfortable with it according to my own Christian faith; yet in the same vein, I must respect others’ interpretation. It is a tricky one this, to put it mildly.

The Conservative party cannot gain from this, if ever that was indeed the leadership’s intention. Thus let us forget for now the party political ramifications, even if the media refuse to. 

It is a free vote. MPs should vote according to what they believe, not whether they will gain or lose personally from it, or how it makes their party look, or whether they think they should even be having to cast a vote. Above all, let us not in the heat of the moment, with passions high, make this a more difficult matter than it is.

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Autumn Statement 2012: A lot of Balls and a bleak midwinter?

Nik Darlington 2.57pm

I was on BBC Radio Scotland earlier talking about the Autumn Statement and just before I was due on air with the Daily Record's political correspondent, the weather report told tales of snow drifts, icy condition and road closures - painting a generally bleak midwinter picture.

In isolation, that report could’ve been about the British economy. Those heady summer days of Olympian achievement and a return to growth seem ever-more distant. This is the backdrop to what the Chancellor had to say to Parliament today, and the inclement economic weather should never be forgotten.

Indeed, Mr Osborne is set to break his own fiscal rules. Yet Gordon Brown also did that, but in the boom years - a symptom of the budgetary misbehaviour that characterised the Treasury under the feckless oversight of Mr Brown and Ed Balls.

The former Prime Minister might have lost a stick insect, but his former lieutenant was not grieving. Cheeks puce and puffed out, he berated, bewailed, gloated and tore into the man who’s office he might have had if only Alistair Darling were a lesser man.

When Ed Balls is good, presentationally at least, he is very, very good. Yet George Osborne is rarely better than when sparring with his opposite number (one gets the impression they enjoy it). I’m as unconvinced about the ‘blame Labour for all the economy’s ills’ line as I was at the time of the 2011 Budget, however Mr Osborne continues to play the card strongly, persistently and - judging by the looks on the faces of Eds Miliband & Balls - effectively. How well it plays with the public is another matter.

Former Tory whip Michael Fabricant relayed to the Chancellor the instantaneous thumbs-up from the bond markets, stating “it is the markets that matter”. Apt, to the point and certainly good news - though what voters think cannot be taken lightly either. I know what someone as acutely political as Mr Osborne will be thinking about first thing he wakes up in the morning.

Conservative MPs will be pleased with the scrapping once again of a 3p rise in fuel duty. Harlow’s MP Rob Halfon has led backbenchers on a spirited and tireless campaign against the duty, though one has to question how much gas is left in that tank. Can fuel duty rises be fought forever?

The lower threshold for income tax continues its rise towards £10,000, as expected. The personal allowance shall be £9,440 come next April.

Also to be welcomed is the further cut in corporation tax to 21 per cent. Let us not forget that it was as high as 28 per cent when the Coalition took office. Businesses can invest a greater proportion of their profits into the likes of expansion and employment. This is very good news.

The hit on working-age benefits will not play well, of course. Shrieks of unfairness can already be heard around the tenured ranks of social policy think tanks, the opposition and the like. And indeed it doesn’t look good. However, there is also the moral argument that at a time when wages are struggling to keep up with inflation, if rising at all, should welfare handouts continue to outpace? It’s a tough call, but I think it is the right one. It shall save nearly £4 billion. We can slice and dice this, that and t’other bits of public expenditure but until welfare payments are properly addressed, that ruddy old deficit shan’t budge much.

Those are my two-pennies’ worth. Plenty of ink shall be spilt and trees felled elsewhere in pursuit of explaining today’s Autumn Statement. I shall just finish with a brief thought on shale gas. I’ve had my concerns in the past about fracking for shale gas. I’m still not convinced of the safety record but I’m open to being so; and if it is the energy panacea some claim it to be, then by all means it should be pursued. Though not at any environmental cost.

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