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Phoebe Arslanagic-Wakefield: Increasingly precarious? Young adults during the pandemic

By Centre Write, Economy & Finance, Phoebe Arslanagic-Wakefield

Introduction

It has been much commented that young adults aged 18-34 have received a particularly raw deal over the past year: much less likely than older age groups to suffer the more serious health consequences of Covid-19, but much more likely to be disproportionately impacted in terms of their finances and freedoms thanks to pandemic lockdown measures.

As part of Bright Blue’s ongoing project examining the inequalities of home working during the pandemic, we wanted to ascertain whether there were differences by age in experiences, to explore whether young adults were indeed struggling more as a result of Covid-19 and the resulting lockdown measures.

Our analysis finds that there are three types of experience during the pandemic where significant differences between different age groups emerge: financial, psychological and relational.

Methodology

Polling was undertaken by Opinium and conducted between 19th and 26th February 2021. It consists of one sample of 3,003 UK adults, with 836 respondents aged 18-34, 997 aged 35-54 and 1,171 aged over 55. The sample was weighted by Opinium to reflect a nationally representative audience.

Financial

Those aged 18-34 are most likely to report their personal income has neither increased nor decreased since March 2020 (42%). But 29% of them report an increase and 20% report a decrease, meaning – somewhat surprisingly – that those aged 18-34 are the age group most likely to report that their personal income has increased since March 2020, as shown in Chart 1 below.

In comparison, 20% of those aged 35-54 and 15% of these aged over 55 report that their personal income has increased since March 2020. This means that 18-34 year olds are the only age group which are more likely to report they have experienced an increase in their personal income than a decrease since March 2020. This contradicts the prevailing assumption that young adults have fared worse financially as a result of Covid-19 and the resulting lockdown measures.

However, other data from Chart 1 paints a different picture. A majority (53%) of those aged 18-34 report having to dip into their savings to cover daily expenses since March 2020, while 40% report not having to do so, making those aged 18-34 the age group most likely to do so. In contrast, a minority of those aged 35-54 (37%) and over 55 (26%) report having to dip into their savings to cover daily expenses since March 2020, with a majority in both of these age groups reporting not having to do so (59% and 73% respectively).

Young adults not only seem to have been more reliant on savings during the pandemic, but on borrowing too. Though those aged 18-34 were most likely to report that they did not have to borrow money to cover daily expenses before March 2020 and still do not (44%), nearly a quarter (24%) report having to borrow more money to cover daily expenses, making them the age group most likely to do so. Meanwhile, 14% reported borrowing the same amount as before and 9% borrowing less.

A majority of those aged 35-54 (62%) and aged over 55 (89%) report that they did not have to borrow money to cover daily expenses before March 2020 and still do not. Most notably, only 16% of these aged 35-54 and 5% of those aged over 55 report borrowing more to cover daily expenses.

Overall, young adults aged 18-34 in some respects have been financially worse impacted as a result of the pandemic and resulting lockdowns, relying on their savings and borrowing more. But in other respects – specifically whether their personal income has increased – young adults aged 18-34 are more likely to have done better than other age groups since March 2020.

Psychological

Having shown variation in financial experiences since the start of the pandemic relative to other age groups, we also found a differing impact of Covid-19 and lockdown measures on young people’s mental health. As Chart 2 below illustrates, asked whether, since March 2020, their mental health has improved, young adults are most likely to report it has worsened (36%). This means that those aged 18-34 are the only age group where the highest proportion of people report experiencing worsening mental health. However, interestingly, they are also the age group with the highest proportion of people reporting their mental health has actually improved, with over one in five (22%) of young people reporting this.

Meanwhile, those aged 35-54 are most likely report that their mental health has neither improved nor worsened since March 2020, with nearly half (46%) reporting this. However, the same proportion of 35-54 year olds report that their mental health has worsened as 18-34 year olds, with 36% reporting this. Meanwhile, a firm majority of 64% of those aged over 55 report that their mental health has neither improved nor worsened since March 2020, with 30% reporting it has worsened.

Yet, a much smaller proportion of those aged 35-54 (14%) and aged 55+ (3%) report that their mental health has improved during the pandemic relative to the youngest adults.

As such, when it comes to psychological experiences, young adults seem to have been the age group most likely to have experienced both better and worse mental health during the pandemic and resulting lockdown measures.

Relational

We also unearthed important differences by age group on a particularly sensitive subject: the experience of domestic abuse since the start of the pandemic. There are already widespread fears that this dreadful aspect of people’s relational experiences has grown in prevalence and intensity because of lockdown measures. [i]

Asked whether, since March 2020, they have experienced domestic abuse, our polling shows that those aged 18-34 report experiencing domestic abuse since March 2020 at a higher rate than other age groups, as is shown in Chart 3 below.

Seventy-nine percent of those aged 18-34 report they have not experienced domestic abuse since March 2020. However, a troubling 11% report that they have and a further 7% that they have not but are concerned that they may.

In comparison, stronger majorities of those aged 35-54 (88%) and over 55 (97%) report they have not experienced domestic abuse since March 2020. Equally, smaller minorities of those aged 35-54 (6%) and over 55 (1%) report that they have experienced domestic abuse or that they have not but are concerned that they may (6% and 1% respectively).

Previous research has indicated that younger adults are at a higher risk of domestic abuse [ii], but our polling shows starkly that for nearly a fifth of young adults (18%), the homes we have all been forced to retreat to over the past year have not been a safe place.

Conclusion 

Our polling provides a snapshot of particular aspects of the financial, psychological and relational experiences of those aged 18-34 during the pandemic.  

Our analysis shows that the experience of those aged 18-34 since March 2020 is distinct in these experiences from that of older age groups. This age group are at a higher risk of having experienced domestic abuse since March 2020, while their experience around their finances and mental health has been much more mixed. Young adults seem to have been more likely to experience both better and worse financial and mental health during the pandemic and resulting lockdowns. 

Notes

The relevant data tables for the polling can be found here. 

We are grateful to Opinium for advising on and carrying out the survey, and to Barrow Cadbury Trust and Trust for London whose sponsorship have made this work possible. Barrow Cadbury Trust and Trust for London do not necessarily endorse this analysis, over which Bright Blue retains complete editorial control.

 

[i] Ryan Shorthouse and Phoebe Arslanagić-Wakefield, “Domestic abuse is everyone’s business”, Conservative Home, https://www.conservativehome.com/platform/2021/02/ryan-shorthouse-and-phoebe-arslanagic-wakefield-domestic-abuse-is-everyones-business.html (2021).

 

[ii] “Who are the victims of domestic abuse?”, Safe Lives, https://safelives.org.uk/policy-evidence/about-domestic-abuse/who-are-victims-domestic-abuse (2015).

May 3, 2021

Mehroz Shaikh: A coherent industrial strategy is essential for Global Britain

By Centre Write, Economy & Finance

Arm is a Cambridge-based British semiconductor design firm whose blueprints for chips are used to make cars, smartphones, advanced military hardware and more. Its clientele, including Apple, Qualcomm, and Huawei, rely on its core architecture for their chips. Arm is everywhere and has become an integral part of the global technology ecosystem. 

Semiconductors are the new oil. It is used in almost all advanced computationally driven technologies, including 5G. But being extremely complex to make, there are few players in the game. Arm’s position as a leader in advanced chip architecture design is the reason why the British Government has intervened this month in its sale to the Californian GPU maker Nvidia. 

Semiconductors are pieces of silicon that contain several ‘transistors’, components that allow the flow of current, linked together by a circuit etched into the surface of the silicon. Taiwan’s TSMC is the most advanced and powerful manufacturer on which the US relies for most of its military hardware. This reliance has turned TSMC into a sovereign asset for Taiwan as the US will defend it against Chinese incursions to protect its supply. 

But the core architecture, as mentioned above, in a lot of these chips is designed by Arm, making it a uniquely powerful entity in global geopolitics. Soon that may not be the case if its sale to the Californian company Nvidia materialises. 

Currently, Japan’s SoftBank owns the firm, but because it is a multinational holding group with stakes in many different industries, its influence and control are largely minimal. However, Nvidia is a business whose products are used in computers, gaming devices and massive data centres where AI is trained. As part of Nvidia, Arm can be controlled more heavily to serve its own needs. Arm could potentially also be forced to dump the clients its master sees as competitors. This restructuring would surely harm Arm’s trusted position as a neutral high-end chip blue-print designer. Most significantly, though, Arm will become part of the Committee on Foreign Investment in the United States (Cfius) and face American regulations.

Arm, a global leader in chip design, is one of the technologies that make Britain relevant to the world. With the City of London potentially never getting the equivalence deal from the EU, allowing it to work in its territory freely like before, advanced tech companies become even more essential for Global Britain’s agenda. 

To chart its own course, Britain has to be at the cutting-edge, leaving Europe behind and looking to the future. Boris Johnson is on the right track with plans to invest heavily in science and technology-driven industries of the future like green energy and fintech. However, semiconductor players in Britain have been taken lightly for too long. If the Nvidia sale goes ahead, while the establishment sit back and let the market do its thing, as The Economist suggests it should, Britain will become even more vulnerable and subjected to American whimsy. Global Britain’s reputation depends on its being an indispensable partner, offering something no one else can, and not just to the US.

Relying purely on market forces would undermine Britain’s position, particularly after Brexit. Playing by the market rules means ceding control to the so-called ‘developmental states’ like Japan, South Korea and China, where the state plays a significant role in nurturing and powering local industries. Britain has always been in the opposing category of market economies. However, the developmental state model is not so alien to how Britain has been managed for centuries, as organisations supported by the Government “played central roles in creating and sustaining innovation-based growth in the UK”. Support and a little protection are what Britain needs to secure its local semiconductor firms in a nearly £5 trillion industry.

It is not just about the money; Britain’s military depends on semiconductors too. Modern military equipment devices such as data display systems and aircraft guidance-control assemblies cannot work efficiently without them. As technologies advance rapidly, their dependence on semiconductors will only increase exponentially. The military importance of semiconductors underlines the need to secure supply chains with manufacturers such as TSMC.

Local manufacturers can technically be built, but the exploding costs and rapid advancement of Taiwan’s TSMC and South Korea’s Samsung (the world’s number two producer of semiconductors) mean Britain’s manufacturing will not be good enough, holding back the overall advancement of where its strengths lie. With its world-beating manufacturing ecosystem and over £70 billion investment in the semiconductors industry, even China is bound to fall behind Taiwan and South Korea by five or so years. But the core design being based in Britain means that it is almost just as indispensable to TSMC to the world. Thus, allies will support Britain’s supply chains as long as it remains in this position. 

The British Government’s much-awaited intervention in Arm’s sale this month is, therefore, highly welcome. In recognition of Britain’s vulnerabilities and strengths, it should make its verdict according to what kind of future it wants for the country. Dominic Cummings’ dream of turning Britain into a tech powerhouse of the world, standing shoulder to shoulder with the East Asian Tigers while still carrying its grand cultural heritage, is the vision the Government should be working towards turning into reality. The Arm case should inspire the Government to recognise its overlooked success and focus on turning its exception into Global Britain’s norm.

Mehroz is currently undertaking work experience at Bright Blue. Views expressed in this article are those of the author, not necessarily those of Bright Blue. [Image: RAEng]

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April 30, 2021

Paul Howell MP: Rebuilding social infrastructure must be at the heart of levelling up

By Centre Write, Economy & Finance

As one of the Conservative MPs successful in breaking through Labour’s ‘Red Wall’ in the 2019 general election, I am under no illusions as to the nature of the task before us in reconnecting ‘left-behind’ neighbourhoods. The promise to level up was one of the reasons that voters in Sedgefield put their trust in me at the ballot box – and as a Government it’s essential that the levelling up agenda is focused on meeting the needs and improving outcomes for the 2.4 million residents of England’s 225 left-behind neighbourhoods.

These are the communities on the periphery: the social housing estates on the edges of the towns and cities of the Northern Powerhouse and Midlands Engine, and the coastal or former colliery communities, often at the end of the line – or on no line at all. Not only are these areas economically and socially deprived, but they also suffer from a combination of poor connectivity, both digital and physical, a lack of community assets, and low levels of community engagement in the form of groups, organisations, and networks that bring people together.

Due to this deficit in social infrastructure, these left-behind neighbourhoods experience significantly worse outcomes across education, health, and employment than other equally deprived places, and England as a whole, as well as facing economic hardship as a result of the pandemic. That’s why it’s essential that in levelling up we adopt a ‘least first’ approach, targeting investment and attention at those areas that have the highest levels of community needs.

We must also go about things the right way, getting the policy, priorities, and process right. We need to recognise that the work involved reconnecting and rebuilding the social fabric of those communities that have been overlooked by governments for decades is a long-term commitment. Recalling previous regeneration programmes that failed to sufficiently involve communities in decision-making, it’s also essential to support and resource communities themselves to take the lead in the decisions that affect their local areas.

Neighbourhood-level investment needs to go hand-in-hand with supporting and resourcing communities to build the confidence and capacity required for transformational and enduring change.

This is where the importance of social infrastructure, and social capital, comes in. When reconnecting left-behind neighbourhoods, attention usually first focuses on physical infrastructure: building new railways, roads, and roundabouts. This of course plays a major role, and from my own experience in working to reopen the Stillington Spur to passengers in the North East, reversing the Beeching cuts will be vital in ensuring that communities cut off from opportunities can be reconnected. The publication of the National Infrastructure Strategy therefore represents a very welcome and significant change in investment policy.
However, reconnection is about much more than investment in economic infrastructure.

Alongside boosting physical and digital connectivity, of equal importance is targeted investment in the local social infrastructure that is so essential to underpinning modern healthy and prosperous communities and economies: the spaces and places in the community where people can meet and interact, from community centres and pubs, to libraries, leisure facilities, and parks, as well as support for the local groups and organisations that have played such a vital role in the response to the pandemic.

As Co-Chair of the cross-party All-Party Parliamentary Group (APPG) for left-behind neighbourhoods, I’ve been working with colleagues from across Parliament to help tackle the social infrastructure deficit faced by left-behind neighbourhoods. As we have discovered through our research and APPG evidence sessions, as well as suffering worse outcomes across a range of metrics, this deficit can have deleterious effects on other aspects of life in the community, such as through lower levels of social capital, the ‘glue’ that binds our communities together.

Recent Survation polling published in our APPG’s Communities of trust report found that there were much lower levels of volunteering and membership of local community and social action groups in left-behind neighbourhoods. As a result, left-behind neighbourhoods have had less community capacity to respond collectively to the challenges they face and less success in accessing external support and resources. This issue was identified in Communities at risk, the APPG’s research into the early impact of Covid-19, which found that left-behind neighbourhoods had lower levels of mutual aid activity than other equally deprived areas, and received significantly less external charitable Covid-related funding support, around a third of the amount of the national average for both.

That’s why the APPG has been making the case for urgently needed investment in the social infrastructure of left-behind neighbourhoods. Over 40 parliamentary members recently wrote to the Prime Minister calling for the Government to commit £2 billion of funds from the next wave of dormant assets to create a new Community Wealth Fund targeted specifically at left-behind neighbourhoods.

If levelling up is to mean anything, it must mean that left-behind neighbourhoods have the capacity and access to the funding, knowledge, support, and resources needed to reconnect with the skills, opportunities, services, people, and places that the rest of us often simply take for granted.

Paul Howell MP is the Member of Parliament for Sedgefield and the Co-Chair of the All-Party Parliamentary Group for left-behind neighbourhoods. This article first appeared in our Centre Write magazine The Great Levelling?. Views expressed in this article are those of the author, not necessarily those of Bright Blue. [Images: UK Parliament and Zach Rowlandson]

April 13, 2021

Alicia Kearns MP: Road to prosperity – the importance of infrastructure for levelling up

By Centre Write, Economy & Finance, Transport

We all know that the United Kingdom is a competitive international economy. This fact sometimes risks being taken for granted. London is the world’s financial capital, our professional services industry is globally first class, and our labour market, Covid-19 notwithstanding, is one of the most flexible in the OECD. 

However, the Covid-19 pandemic has also thrown into stark relief the ways in which our economic structures can be improved, and one area where we can make a real and immediate impact as we recover is infrastructure investment. 

The World Economic Forum (WEF) reported in 2018 that the UK came 26th in the world for the quality of its roads, 22nd for the efficiency of its train services, 40th in terms of mobile subscriptions, and 51st in terms of transmission and distribution losses in the electricity supply. Our road connectivity index came only 29th.

A recent Policy Exchange report noted that, according to the IMF, our capital stock as a percentage of GDP is lower than the US or France, and comparable to Germany, which has famously low government investment in infrastructure.

Conversely, the WEF also found that we were the eighth most competitive economy in the world.

The disparity between our infrastructure rankings and our competitiveness makes one thing clear: the UK is competitive, but we are hindered, not helped, by the quality of our public infrastructure.

That’s why, with interest rates at record lows, and with plenty of spare capacity, the British state has the means to make strategic investments in infrastructure now, to generate a long-term increase in output, reduce disparities between the regions, and power local economies from Caithness to Cornwall. The Prime Minister has been clear that this is his foremost priority, and it is very much welcome, especially in the East Midlands where historically we have been overlooked.

Infrastructure needs to be strategic because the benefits are long-term and have a dynamic impact on the economy. That is why I am very pleased that the Government has already adopted changes to the Green Book, raised initially in a Centre for Policy Studies report in June, that will shift focus from the use of a benefit cost ratio (BCR) to considerable weight being placed on an actual strategic case. This could have a real impact on projects in leftbehind parts of the UK.

Take the part of the A1 that serves my constituency of Rutland and Melton. The East Midlands already has one of the lowest per capita spending on capital in the country, to the tune of £169 per head lower than average, according to a recent Policy Exchange report. For years, local authorities and Local Enterprise Partnerships have raised concerns about significant congestion, and a very high rate of accidents, on the stretch of the A1 between Blyth and Peterborough. There is a lane closure more than once a week, and full closure once every two weeks. The BCR is 0.47 (or 47p for every £1 invested) which is normally too low. However, this is also because the very congestion on the A1 has made local authorities hesitant to plan for any development on or near the road, out of serious concerns for usability. 

The strategic case to upgrade the A1 is robust: it will reduce congestion and hours lost, allow the high percentage of HGVs on the stretch of road better access, and allow local authorities across the East Midlands to more strategically use available land. This is a key road for the UK, especially post-Brexit, but until now the BCR made this impossible. These are precisely the kind of long-term projects that we need to commit to now to generate growth in our regions. Changes in the Green Book are a brilliant first step, but they need to be coupled with immediate investment to power the recovery. 

I welcome the Government’s £100 billion in capital spending, and I agree with Sajid Javid’s After the Virus report that the 3% average investment ceiling should be relaxed. Policy Exchange has recently noted that 5G broadband and green investment are two major areas for further investment, because they can bring immediate impacts, and support rural communities.

I fully embrace the Government’s commitment to green investment, but I know some constituents are worried that, while the shift will happen, it will leave rural areas behind.

That’s why the Government needs to expand the Rapid Charging Fund to ensure all hard-to-reach rural areas are supported. At the same time, we can expand the 5G voucher scheme, working directly with local authorities, to boost productivities in our towns and villages. The 2019 Conservative manifesto commits to ensure every person is within 30 miles of a charge point, and gigabit-capable broadband in the home is a game changer for rural areas. Let’s make sure we hit them! 

There are more ways we can boost our recovery by levelling up across the UK, and indeed it’s a sign that much more work needs to be done for the UK to reach its potential in every region. We are on the right track and the Government is listening fully to those who have too often been forgotten in investment decisions. By powering up through shovel-ready projects now, and making long-term, strategic investments in our regions – like the East Midlands – we can build a more prosperous Britain for all, and seize prosperity out of the jaws of the pandemic. 

The Prime Minister has a bold and empowering vision of a country where we have levelled up and built back cleaner and better after the pandemic. He has my full support in this commitment which will transform our country and set the agenda for generations to come.

Alicia Kearns MP is the Member of Parliament for Rutland and Melton. This article first appeared in our Centre Write magazine The Great Levelling?. Views expressed in this article are those of the author, not necessarily those of Bright Blue. [Images: UK Parliament and Bob McCaffrey]

March 15, 2021

Jeet Bains: The Budget is the Chancellor’s opportunity to use his political capital

By Centre Write, Economy & Finance

Budget Days are strange affairs. There is a certain pomp associated with Budget Day. The nation used to listen intently to whether the price of beer, wines and spirits would increase, and what economic forces would be unleashed on a packet of fags. Perhaps not all that much has changed.

But beyond the economic jargon, beyond accountants watching like hawks the minutiae of marginal tax rates and ad-valorem duties, beyond Per Capita Real GDP and the Wholesale Price Index….beyond all that there is a tone and a philosophy and a message to the public. We get a sense of the competence of what is being presented (pasty tax anyone?), and we get a perspective on the manner of dealing with public priorities. And crucially, in Budgets that little word with a big punch is won or lost: trust.

The Chancellor, Rishi Sunak, has already scored numerous plus points during his tenure. Treasury officials praise his knowledge and skill, and stakeholders as wide-ranging and the Confederation of British Industry and the Trades Union Congress have been open about how impressed they are with him. It’s crucial that this confidence and trust is maintained in the March Budget. For all its flaws and omissions, the furlough scheme has not only been a life saver for millions of families in Britain. It has been a pioneer policy, emulated around the world. And the various loans, grants, mortgage holidays and tax deferrals have been a life-line for many.

This impressive platform must now be built upon. This trust must be solidified. The furlough scheme, for instance, left out a vast swathe of self-employed people. Artists, musicians, graphic designers, IT experts, project managers, builders – the self-employed today are far more than what we may have thought of in the past. The Chancellor should provide help for this group, using reasonable metrics such as previous tax returns and invoice history. Equally, the Chancellor might look at the plight of university students. During the pandemic university students have been doing all learning online, except some practical elements where relevant, often going back to the family home yet still paying their university accommodation rent. Quite apart from the awful student experience, the unfairness of handing over £9,500 a year and paying for a room that they don’t even live in seems to defy natural justice.

As offices space is likely to be relinquished by many companies, this is an opportunity to be more innovative with Special Economic Zones. Thinking beyond just free “ports”, incentives could be offered to, say, bio pharma firms or data science start-ups to move into newly vacated spaces that also benefit from proximity to existing business services and, in the case of London, the City. The tax intake that the Chancellor no doubt requires may take longer to materialise from this approach, but it will be enduring and reliable. And we’ll have fantastic new sectors that will provide high quality jobs – all thanks to longer term thinking and nurturing new industries.

The old adage about threats and opportunities being opposite sides of the same coin is no less true in the current circumstances. At this crucial time, after a searing pandemic and an exhausting set of lockdowns, the Chancellor must look beyond the short term and the obsession of immediate metrics. He should consider leveraging the trust and rapport he has engendered, and liberate a phoenix from the ashes.

Jeet Bains is a member of Bright Blue and a councillor in the London Borough of Croydon and was a parliamentary candidate in the 2019 general election. Views expressed in this article are those of the author, not necessarily those of Bright Blue. [Image: Number 10]

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March 1, 2021

Joseph Silke: Are we heading for negative interest rates?

By Centre Write, Economy & Finance, Joseph Silke

In response to the ongoing coronavirus pandemic, the Bank of England has cut base rates of interest to an all-time low of just 0.1%. This is down further from its initial emergency cut from 0.75% to 0.25%, made only one week prior. Officials are stretching the limits of conventional monetary policy to avoid another major economic downturn. With base rates now at almost zero, could the Bank be about to make a more controversial step and introduce negative base interest rates for the first time in history?  

Negative interest rates work in the opposite way to traditional interest rates, meaning that those who deposit into accounts must pay money to the bank to store their cash, rather than receiving money themselves. In effect, borrowers get paid to borrow. This ‘use it or lose it’ approach for lenders is used to discourage saving and encourage spending, to try stimulate the economy. When central banks do it, it is designed to incentivise commercial banks to lend more freely. This upside down way of banking has been flirted with in some radical circles, but this has caused unease among many.

Negative interest rates worry some policymakers because they fear significant distortions in the market. The Bank of International Settlements has warned of “eroding incentives for the private sector to maintain adequate buffers against financial stress”. Moreover, negative rates disincentive sensible saving practices by effectively penalising savers and could have unforeseen consequences for the operations of pension funds, risking leaving swathes of the population out of pocket.  

There is also the simple uncertainty of uncharted waters. Modern economies are so complex that analysing risk outside of the usual frameworks becomes a major challenge. When the normal rules break down, the models which economists have relied on to assess trends and outcomes begin to lose their potency. Why, then, have negative interest rates continued to grab headlines?

The context in which some central banks have been tempted to use negative rates is one in which the usual monetary levers have been exhausted. In the wake of the global financial crash, central banks slashed rates. Indeed, figures from last year showed that central banks have cut rates more than 800 times since the start of the Great Recession. This cutting to lower and lower rates has meant that many central banks haven’t been left with much traditional room for maneuver. As global growth has remained sluggish, some believe that the only recourse left is to go negative.  

In February 2015, Sweden’s central bank was the first in the world to implement a negative main repurchase rate, launching a historic experiment in monetary policy. The Riksbank, which is the world’s oldest central bank, lowered its rates from 0.25% to -0.10%. The move was controversial, but was coupled with a mass purchase of Swedish government bonds as part of a desperate effort to pump money into the Swedish economy and avert deflation.

Five years later, the experiment has concluded. It is too early to properly assess the ramifications of the experiment, though there are fears that the consequences for the behaviour of economic actors could be perverse and damaging in the long term. Although the Swedish economy is relatively small, the experiment has attracted the fascination of policymakers. For now, the Riksbank has returned its main repo rate to zero, so not back into genuine ‘positive’ territory yet. 

While he was still Governor of the Bank of England, Mark Carney said only last year that he opposes negative interest rates, claiming that they are “not an option” for the UK. He instead emphasised a commitment to the traditional approach of keeping rates as low to zero as possible, but without drifting into negative rates. Last month, just as the coronavirus was only beginning to emerge as a potential global challenge, he nevertheless confessed that we are “close to those limits” of what conventional policy can achieve. 

The new Governor, Andrew Bailey, is experiencing a baptism of fire with collapsing markets and very few weapons left in the traditional arsenal. Thrust into the top job during this most unprecedented of crises, he must carefully nurse the economy back to vitality. He has been described as a “safe pair of hands” rather than a radical. Bailey has insisted that no policy has been ruled out, but is said to be resistant to negative rates. As this crisis deepens, and perhaps becomes more protracted, however, it is possible that the Bank will reassess the limits of its radicalism.

Joseph Silke is Research and Communications Assistant at Bright Blue.

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March 28, 2020

Marco Oglietti: Trade policy in the post-Brexit era: a matter of balance?

By Centre Write, Economy & Finance

Even though the United Kingdom officially left the European Union on 31 January 2020, negotiations regarding the future relationship between the two parties are still ongoing. Many points related to trade issues still have to be agreed upon: while both EU chief negotiator Michel Barnier and cabinet minister Michael Gove have expressed optimism regarding the progress of the talks, major disagreements are present with respect to how close the relationship between the two economic powers should be. For instance, European Commission President Ursula Von Der Leyen has explicitly stated that the UK will have to face a trade-off between maintaining a close partnership with the continental bloc and more policy autonomy. 

Another major challenge for the future of UK trade policy is represented by the preferential agreement with the US currently under consideration. A document published by the Office of the United States Trade Representatives in February 2019 highlights the presence of very strong demands from the American side concerning technical standards harmonisation, regulatory practices and intellectual property rights. Furthermore, US President Donald Trump’s recent remarks on the UK Government’s decision not to completely exclude Chinese telecommunications giant Huawei from its 5G network infrastructure has further stressed transatlantic relations. On top of these fundamental challenges, the UK will have to face several obstacles in pursuing new preferential trade agreements with third countries now that it is no longer part of the European Single Market.

Given these current developments, what will a post-Brexit trade policy strategy look like? To answer this question, the British Government will have to consider not only the commitments previously made in the wake of the 2016 referendum but also all the stakes involved. The UK is currently facing a trilemma. 

First, as reiterated multiple times by Prime Minister Boris Johnson, Brexit will have to honour the original promises of newfound political independence, meaning that any future agreement will necessarily have to be not excessively bound to pre-existing commitments and to EU legislation. 

Second, the British Government will have to take into account the needs and interests of business in order not to cause too much disruption to their operations and to avoid losses in efficiency and competitiveness. 

Thirdly, and possibly most importantly, ensuring that the UK will gain or, at least, not lose political leverage vis-à-vis its trading partners must be a fundamental objective for any sort of future trade policy strategy. 

Business associations and interest groups have already made their voice heard concerning the objectives policy makers will need to pursue. A position paper recently published by the Confederation of British Industry (CBI) gives us a clear view of what the demands of British business are. For instance, they stress the importance of ensuring that no tariffs are applied to UK-EU goods, of regulatory cooperation on testing and compliance, and of minimising the burden of customs documentation, among others. 

Similar sentiments are echoed by The Society of Motor Manufacturers and Traders (SMMT), which represents a significant share of the manufacturing sector, demanding that  tariff-free trade between the UK and the EU is guaranteed for the automotive industry and advocating for freedom of movement of staff employed in production facilities. The financial and banking sector, represented by the British Bankers’ Association (BBA), prioritises re-establishing framework arrangements previously present in other EU legal frameworks (e.g. data protection) and establishing new ambitious free trade agreements with third countries. 

Some of these demands are potentially incompatible with the Government’s willingness to strike a CETA-like deal with the EU, which would instead be more in line with Brexit’s promises. Moreover, the idea of signing new agreements with third countries, although favoured by both Westminster and business groups, may present several political and geopolitical challenges as shown by the recent developments in the UK-US relations, which in turn may paradoxically undermine the UK’s pursuit of political independence.

In conclusion, the British Government will have to play their cards right in order to design a successful post-Brexit trade policy. Finding the right balance between the three broad objectives highlighted above will be no easy task. It is of vital importance that Westminster carefully evaluates the costs and the benefits of every option on the table to ensure that the UK maintains a competitive position in the global market and that business will not suffer any negative short and medium-term consequence.

Marco is currently undertaking work experience at Bright Blue. Views expressed in this article are those of the author, not necessarily those of Bright Blue.

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March 26, 2020

Andrew Gibbons: Towards Better Policy Formulation

By Centre Write, Economy & Finance, Politics

To succeed in the marketplace for ideas, grounding policies in economic analysis is more important than making them distinctively partisan.

Good policies should be effective and durable.  While some may argue that Conservative policies should be distinctive, former Labour adviser John McTernan says that recent Conservative policies have been essentially bipartisan.  He asserts that present day Conservatives have not had “ideologically transformative ideas for public policy” in the way that Margaret Thatcher’s government did in the 1980s.  While not denying that some later Tory-initiated policies have been a lasting success, he claims these have all been bipartisan.

There is of course nothing wrong with policies having cross-party support.  Indeed, this may be desirable as such policies are more likely to endure in the long-term, a key example being auto-enrolment in pensions.

Bipartisan policies were familiar territory to New Labour.  Tony Blair writes in his book A Journey that “the credibility of the whole New Labour project rested on accepting that much of what [Margaret Thatcher] wanted to do in the 1980s was inevitable, a consequence not of ideology but of social and economic change…  Britain needed the industrial and economic reforms of the Thatcher period.”

McTernan sees the characteristic Thatcher policies as being “the trifecta of right to buy, privatisation and ending union power”.  These, he says, were fundamental in impact and irreversible.  We might also note Thatcher’s emphasis on entrepreneurship, deregulation and monetary discipline.

These policies were mostly based on economic analyses provided by an ecosystem of market oriented scholars and think-tanks, notably the Institute of Economic Affairs, the Centre for Policy Studies and the Adam Smith Institute.  Since those times, policymaking by Conservative governments has appeared less single-minded, if not intellectually rudderless or downright opportunistic.

What is lacking in much current Conservative policy debate is a core of economic analysis on which policies can be built.  Typically in the past there was an expectation that if markets were able to function properly, this would deliver efficient and desirable outcomes in many areas.  Where markets didn’t work, the job of government was to identify and rectify or bypass market failures, whether these were based on lack of competition or the existence of externalities.

Stian Westlake dates this phenomenon more recently, to the change of leadership in 2016.  In The Strange Death of Tory Economic Thinking he argues that since Theresa May became prime minister, the Conservatives seem to have stopped talking and thinking about economics.  As a result, “policy areas that would traditionally have been seen through an economic prism are discussed from a social or national perspective instead.”  He sees “a government that shies away from economic thinking, that tends to see issues that others might see as economic through other lenses, and that has made little attempt to tell an economic story about the UK.”

Clearly, focussing on long term productivity growth should be central.  Only by fostering income growth can we expect to deliver benefits across the nation.  Without growth and prosperity, redistribution will not work electorally, since robbing Peter to pay Paul is not just zero sum; it involves, in economists’ parlance, deadweight losses that potentially make everyone worse off.

Bowman and Westlake suggest in Reviving Economic Thinking on the Right that the principles – markets and free enterprise, strong institutions and a government that creates such conditions – are the easy bit.  But going beyond principles, we need answers to the challenges our communities face.  This means producing solutions which recognise self-interest while respecting the needs of those less able to support themselves.  The challenges include reinstating economic growth to boost incomes and employment, especially outside London and the South East, properly funding public services, ensuring decent housing for all, fighting widening inequality and discrimination, tackling climate change, and more.

Policy approaches founded on economic analysis will aim to rectify market failures wherever possible (whether addressing skill shortages or CO2 releases), to work with the grain of markets to avoid costly distortions (e.g. minimising impacts on behaviour unless that is a target variable), and to make redistributional measures incentive compatible (i.e. encouraging people to follow the rules).

While the challenges facing government are generally understood, original but workable policy solutions are valuable currency.  We now have a new government with a yet to be articulated version of one-nation Conservatism and little ideological baggage beyond taking the UK out of the European Union.  There is plenty of scope for ambitious think tanks to seed the agenda.

A flourishing economy will always facilitate many of the things governments want to do and so is a high priority.  Beyond that, deploying economic analysis to support proposals in any field will enhance their credibility, their effectiveness and probably their durability.  We need to dig deep and trawl widely to find analytically sound policy packages to offer the new government.

Andrew Gibbons is a former UK government economist.  Views expressed in this article are those of the author, not necessarily those of Bright Blue.

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January 17, 2020

Mary Dejevsky: The property-renting democracy?

By Centre Write, Economy & Finance, Housing & Homelessness

The idea that the so-called ‘property-owning democracy’ is, if not dead, then dying, is now almost treated as established fact. Members of the self-styled ‘generation rent’ are especially vocal, claiming that they might as well spend their paltry earnings on short-term pleasures, as home-ownership will forever be out of reach. There is even a culprit: we baby boomers are accused of clinging to big homes that we bought for a supposed pittance, made a mint from, and now refuse to vacate gracefully, even as we extract equity to fund our luxury lifestyle.

Well, I am sorry, but this is a travesty – particularly the harnessing of housing to the popular, but pernicious, concept of a ‘generation war’. If anyone is suffering from present financial realities it is the ‘oldies’ and upcoming ‘oldies’ who receive next to no return on the savings successive governments told them to accrue for their retirement, even as they must look forward to selling their homes to cover savagely means-tested care costs.

In fact, it would make sense, given all the competing pressures, for them to plunder their pension funds or release equity from their houses, less to repair the roof or cruise the world, than to help their grandchildren to buy a home. Hang on a moment, though, financial firms are worried that so many are already doing this that they could run out of money in their dotage.

So, the supposed generational war in housing is nothing of the kind. It is the old war between those families that can and will help their offspring to buy somewhere, and those who cannot.

But the whole argument about the ’property-owning democracy’ needs to go back to first principles. Was there ever such a thing, really, as a ‘property-owning democracy’ in the UK and, even if the term carries conviction , was it necessarily such a wonderful thing?

The millennials’ grievance often seems to boil down to “Woe is us, that we cannot buy our own home in our twenties”. But the time when your average twentysomething could take out a mortgage and buy a home – the heyday of the ‘property-owning democracy’ – was limited to a single recent decade, when the lax credit that funded it helped precipitate the financial crash. Not only were those years an exception – we are now back closer to the norm – but is it really so wrong that, at a time when people stay in education longer and start families later, they should also buy their first home later, too?

Yes, there is a London and South-East problem, caused in part by the openness of our housing market to foreign money and the preference of developers for building £2 million two-bed flats for investors rather than family housing. But today’s ultra-low mortgage rates need to be factored in, too. The £60,000 mortgage my husband and I were granted in the 1980s was proportionately more expensive to service than a £600,000 mortgage today. Is it any wonder house prices have risen in the places people want and need to live? The Government’s ’Help to Buy’ – ’help’ mainly for those who do not need it in raising a deposit – has only made matters worse.

To my mind, the two biggest faults in the UK’s housing market are the concept of the ‘ladder’ and buy-to-let. The first might be seen as the great enabler of the ‘property-owning democracy’. But what it has actually done is to encourage the proliferation of poorly-built ‘starter-homes’, and reinforced the idea of a home as a money-machine. If interest rates start to rise and/or prices to fall, the ‘ladder’ will become a snake. Buy-to-let, for its part, is actually the idea of the ’property-owning democracy’ run wild, thanks to tax inducements.

But it is the combination of the ambitions fostered by the ‘ladder’ and successive governments’ misguided attachment to buy-to-let that has been lethal. The result is less that first-time buyers have faced competition from potential landlords, though that happens, than that the UK’s middle earners have been deprived of something their counterparts in many European countries take for granted: a stable, sufficient and professionally-run rental sector they can afford. Instead of fixed rules and standards, they often have to deal with individuals who can throw them out on any pretext at minimal notice and who regard the property essentially as theirs.

The UK’s property-owning fetish has at once fostered a condescending attitude to renting and militated against serious corporate investment in the rental sector. For our friends on the continent, such a sector at once offers a stepping stone to ownership, and a reliable alternative of decent quality. It is past time that we had the same choice. If the 1990s property bubble is regarded as the heyday of a ‘property-owning democracy’, to be exalted and repeated, then we have got something very wrong.

Mary Dejevsky is a columnist for The Independent, The Guardian and Unherd. This article first appeared in our Centre Write magazine On the home front. Views expressed in this article are those of the author, not necessarily those of Bright Blue. 

November 14, 2019

James Wakefield: Stock buybacks – at what cost?

By Centre Write, Economy & Finance

Stock buybacks are growing in popularity among UK companies, likely a product of the low interest environment and uncertainty over Brexit. While it is not for the Government to instruct companies on how to spend profits, it is their responsibility to encourage investment in capital and R&D so that firms remain competitive. 

Greater sums spent on equity repurchases mean less left over for investment, R&D and wages. Given the dampening effect that Brexit uncertainty has had on investment, the Government should be proactive in urging firms to invest rather than repurchase shares. 

Stock buybacks are regarded by many as a smart method to boost the value of undervalued shares as by repurchasing equity, companies reduce the number of outstanding shares and generally push up their price. Earnings-per-share, an important metric in evaluating executive performance, necessarily increases as there are fewer shares. Perhaps of even greater appeal to executives, buybacks are easy, safe and uncontroversial among shareholders. A resultant rise in the share price will satisfy investors, and if executive bonuses are linked to such increases, all the better.

In the UK, buybacks are on the rise. A Government commissioned report shows buybacks increasing from around £13 billion in 2015 to £22 billion in 2017. Business investment since Brexit has flatlined, reflecting the damage caused by political and economic uncertainty. While the report could not definitively determine causation between these statistics, it is likely that some firms are reacting to Brexit uncertainty by injecting extra cash in buybacks rather than risking investment on new factories, better equipment or R&D. However, the premonitions of a post-Brexit recession will become reality if companies continue to forestall their investment decisions. Moreover, the effects of this hesitancy will extend long into the future if firms become less able to compete globally.

Of note in the report is the finding of a correlation between earnings-per-share incentives in executive remuneration packages and lower levels of investment. Firms that used such targets had levels of investment around a fifth lower compared with those that did not, suggesting that executives may react to earnings-per-share incentives by decreasing investment, possibly to repurchase stock instead. 

At a time of immense uncertainty in the UK, the Government must make every effort to ensure that businesses continue to invest in profitable opportunities. After Brexit, UK firms may have to pay tariffs on exports and therefore it is vital that they invest in methods to lower costs, or risk losing their competitive edge on global markets. Considering the Government’s plans to strike broad trade deals after leaving the EU, a successful Brexit depends critically on UK companies remaining competitive. Equity repurchases will not accomplish this, reflecting at best a ‘wait and see’ strategy and at worst a total lack of imagination from company executives. 

To prevent stock buybacks from crowding out investment, the Government must take action to make spending on capital and R&D a more attractive proposition. From 2019, the Annual Investment Allowance (AIA), which allows firms to claim back corporation tax paid on reinvested profits, was increased to £1 million. This was a positive step, but the AIA is set to revert to £500,000 at the end of 2020. Further increases beyond £1 million must occur to entice behemoths to invest in capital given the major uncertainty in the UK. While indecision is understandable in this context, it leaves Britain ill-prepared for life after Brexit.

To dissuade equity repurchases, the Government must also eliminate the tax arbitrage between the top marginal tax rates charged on dividends (30.6%) and capital gains (28%), which incentivises buybacks. By doing so, buybacks will become, in relative terms, a less efficient form of rewarding shareholders. It should encourage executives to think more deeply on how to utilise surplus cash. 

These measures are important parts of the Government’s wider duty to encourage UK businesses to invest in capital and R&D to ensure they remain competitive after Brexit. To make ‘Global Britain’ a reality, it is fundamental that firms can compete in world markets. The more that investment is withheld, the less likely this will be the case. 

James Wakefield is undertaking work experience at Bright Blue. Views expressed in this article are those of the author, not necessarily those of Bright Blue. 

November 7, 2019
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