Is this analysis too cynical? Or is it fair to uphold scrutiny of the government’s promises? This is a significant area, and if you are targeting a high grade you should be able to paraphrase the key point, which is that until you implement proposed strategies everything is just hot air:
The government has finally delivered its long-awaited energy white paper, says Tim Ambler, and it is “full of good cheer: zero carbon, more jobs, more prosperity, cheaper green energy for all”. Unfortunately, it reads like little more than a wish list. It’s doubtful that it is even a proper white paper at all. White papers are supposed to be policy documents that set out proposals for future legislation. Actual proposals in this document are hard to find.
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Using coal for electricity generation, for example, was already due to cease by 2025. The paper boldly brings that forward to 2024. When the government legislated in 2017 to allow electricity storage, they forgot to define “storage” and will now set this right. But the discussion of networks that this proposal leads to is confused. We should, it says, open up electricity networks to competition, but whether this refers to operating sections of the national grid or running parallel power cables down existing pipelines or digging up our roads to create new networks is not spelled out. Nor are the potentially huge costs if the latter is what is meant.
The “key commitments”, which should have begun the paper and appear on page 87, promise a digital infrastructure that, like Test and Trace, will be “world-beating”. The entire UK transport system will be decarbonised by spring 2021, although the details are not forthcoming. The oil and gas industry will receive “support… to repurpose its existing infrastructure”, though at what cost is not said. Little is said about nuclear power, and one of the most cost-efficient new technologies in this area is not mentioned at all. Electricity will, apparently, provide less than half of our energy needs in 2050, with hydrogen and biomass/fossil fuels, with carbon capture and storage, providing the bulk of the rest. Nuclear and renewables are not mentioned at all in this goal, presumably because their energy will be delivered as electricity, but in that case why is the biomass/fossil fuel energy not included as electricity too? How else could it be delivered? Presumably gas piping will be converted to hydrogen for home heating and hot water fuel cells, although this is not stated.
The white paper does not explore any of these issues nor the comparative costs of the various methods. “This cavalier approach to the economic realities makes it all the odder that the paper can predict the detailed effects on consumers (favourable, of course), not to mention jobs, exports and economic growth. But then it is Christmas.”
THE FREE-TRADE DEAL SERVES PRESIDENT XI’S INTERESTS NICELY
While Britain and the EU struggle to come to terms, 15 Asia-Pacific countries quietly signed the biggest free-trade deal in history. That’s a welcome development, says Simon Wilson
WHAT’S HAPPENED?
In the middle of last month, as the UK and EU were struggling to nail down the world’s first free-trade agreement explicitly aimed at putting up fresh barriers to trade rather than tearing them down, 15 Asia-Pacific economies quietly signed the world’s biggest free-trade agreement. The Regional Comprehensive Economic Partnership (RCEP) has been signed by China, Japan, South Korea, Australia and New Zealand – along with ten southeast Asian countries, all members of the existing Asean trade bloc. The agreement covers almost a third of the world’s population and about 30% of global GDP – and is the first ever free-trade deal between China, Japan and South Korea, the biggest, second-biggest and fourth-biggest Asian economies. Of the major Asian economies, only India has opted out, over concerns over cheap Chinese imports. But as one of the original negotiating partners, it has an option to join at a later date.
WHEN DOES THE DEAL TAKE EFFECT?
It’s likely to be years rather than months, and some of its provisions may not take effect for up to 20 years. After eight years of tortuous on-off negotiations, the deal was concluded following a four-day international summit in the Vietnamese capital, Hanoi, in mid-November. But it must now be ratified by each country, and will not take effect until at least six of the ten Asean nations, and three of the five non-Asean nations, have done so. The key aim of the agreement is the progressive lowering of tariffs to allow more free movement of goods and encourage investment.
HOW IS THIS DIFFERENT FROM THE TPP?
RCEP represents a bigger bloc, but a less comprehensive deal. Since President Trump withdrew the US from the Trans-Pacific Partnership (TPP) trade deal in 2017, it has been renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and was ratified by its 11 remaining members in 2018-2019. The RCEP nations’ overall market size is nearly five times greater than that of the CPTPP, and the trade between them twice as big. Seven countries (notably Japan and Australia) are in both blocs. But crucially, the new bloc includes China and South Korea (and six southeast Asian economies that are not CPTPP signatories). It does not include the Americas members of the CPTPP (Canada, Mexico, Peru and Chile). However, compared with CPTPP, the RCEP is less comprehensive – and with much less emphasis on labour rights, environmental and intellectual property protections and dispute resolution mechanisms.
HOW IMPORTANT IS THE AGREEMENT?
RCEP was conceived as a grand “tidying-up exercise”, says The Economist, bringing together various smaller trade agreements in place between the Asean nations and Australia, China, Japan, New Zealand and South Korea. As such, only a limited amount of Asian trade is affected. Indeed, “of the $2.3trn in goods flowing between signatories in 2019, 83% passed between those that already had a trade deal”. The biggest benefits, in terms of trade liberalisation, will probably come of RCEP’s rules of origin – that is, the principles setting out how much regional content a product must have for it to enjoy lower tariffs. Currently, exports from an Asean state could face three different sets of rules when exported to China, South Korea or Japan. Now such companies will only need to comply with one and the rules are relatively liberal: many products will need just 40% of their value to be added within the region in order to take advantage of lower tariffs”.
WHO GAINS THE MOST?
The RCEP is not “China-led”, in the sense that it was the Asean nations that conceived the pact and have driven it forward. But it definitely serves China’s interests. The old TPP included provisions that reined in state-owned firms and included rules on labour and environmental standards. RCEP includes none of those constraints and is likely to strengthen China-centric supply chains. But a study by Peter Petri of the Peterson Institute and Michael Plummer of Johns Hopkins University estimates that Japan and South Korea will gain the most, with real incomes 1% higher by 2030 than they would have otherwise been.
SO A BIT OF DAMP SQUIB?
It has certainly been over hyped, says Salvatore Babones in Foreign Policy. The RCEP is a “straight tariff-reduction agreement at a time when base tariffs are already low, and countries don’t hesitate to impose punitive tariffs whenever it suits their foreign-policy objectives”. Moreover, it avoids hard issues such as state subsidies, intellectual property theft and investor-state disputes. Yet it remains the biggest free-trade deal in history, says Petri and Plummer for the Brookings think-tank. Together, CPTPP and RCEP are the only major multilateral free-trade agreements signed in the Trump era. And as now configured (ie, without the US) both of them “forcefully stimulate intra-East Asian integration around China and Japan”. RCEP will “help China strengthen its relations with neighbours”, and accelerate northeast Asian economic integration.
WHAT SHOULD AMERICA DO?
In terms of pushing back against China, and reasserting US leadership on trade, the “obvious move”, says the FT, would be for the Biden administration to take the US into the CPTPP. Alas, while “such a move would make sense in diplomatic and economic terms”, it is probably “politically impossible in the current US climate”. There is an interesting geostrategic dilemma for India, too, with its goal of emerging as this century’s second Asian superpower. The Modi government has stood aside from RCEP, but India “must take care it does not relapse into the defensive, inward-looking attitude that has served the country so badly in the past”. And for the Western world as a whole, RCEP presents a salutary reminder. Whatever the prevailing mood of scepticism towards economic liberalisation, “free trade is the best route to greater prosperity”.
Build back wellbeing and you will truly level everyone up
Richard Layard and Gus O’Donnell
The Sunday Times
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The prime minister’s top post-Covid new year’s resolutions are probably “build back better” and “level up”. But what constitutes better, and what should we actually level up? We believe a better world would be one in which people were more satisfied with their lives — in which they felt more worthwhile and happier. And levelling up would mean helping those who were most unhappy to lead more fulfilling lives. All this needs to be done in a sustainable way appropriate for the country hosting the next global climate change conference.
In a word, Boris Johnson’s aim should be the wellbeing of the people, now and to come. This shift of aim would make a huge difference to his policy priorities. He would focus more on what matters most to people — their mental health and physical health, their children, their family stability, their work and community life and food on the table. These are the social capital in our lives, and they affect our happiness much more than the physical infrastructure around us.
So building back better should not be mainly about roads, railways and buildings. It should be about spending more on mental health, child wellbeing, skills, youth services, family support and care of the elderly. And, of course, combating climate change, which will destroy the wellbeing of future generations.
These arguments are not just hunches. They are based on decades of serious research about what matters most to people, and about how their lives can be improved at least cost to the exchequer. People vary hugely in their satisfaction with their lives, and this is the fundamental inequality that calls for “levelling up”. Research shows that surprisingly little of the variation in wellbeing is due to economic inequality. Very much more is related to the huge variation in mental and physical health, and in the quality of relationships at home, at work and in the community.
Fortunately, there are effective ways in which we can help with these problems, and they are not hugely expensive compared with large capital projects. For example, 50% of people with crippling depression or anxiety disorders will recover with a course of modern psychological therapy costing about £1,000. This is the kind of area where extra spending should go.
Or take schools. If you want to predict if a child will become a happy adult, the best predictor is not their qualifications but their emotional health. Small amounts of money could transform the development of child wellbeing in schools, but plans to introduce mental health support workers to schools still cover only a third of the country. Most expenditure on mental wellbeing pays for itself by cutting the numbers on disability benefits, reducing crime and raising productivity. And Covid has yet again revealed its critical importance.
Many examples of the huge shift in priorities we need were given in an excellent report by the all-party parliamentary group on wellbeing economics. And the mechanism to make the change is already in place. For the government’s spending priorities are meant to be evaluated using the Treasury’s green book. This already says that the objective is “social wellbeing”.
It is hugely in the government’s interest to make this shift. For powerful new research shows that re-election depends more on the wellbeing of the people than on income or jobs. Both the Organisation for Economic Co-operation and Development and the EU now call on member countries to “put people and their wellbeing at the centre of policy design”. Three countries do this explicitly — New Zealand, Scotland and Iceland. They are all small countries led by women. Now is the time for a large country led by a man to follow suit.
Professor Lord Layard is co-author of Can We Be Happier? (Penguin, 2020) and professor of economics at the London School of Economics. Lord O’Donnell is a former cabinet secretary and chairman of Frontier Economics
Few phrases have more capacity to divide businesses leaders than state aid. But it is one that we will hear a lot more about in the brave new post-EU world. Boris Johnson swept to victory last December by promising to “get Brexit done” and put British industry first. He would change public procurement rules to “buy British”: “We’ll back British industry by making sure we can intervene when great British businesses are struggling.”
It was this vision of a land of milk and honey, freed from the shackles of European influence, that was so enticing for voters, particularly in post-industrial areas. Many of those former Labour “red wall” seats had suffered decades of decline, leaving people increasingly reliant on unstable and low-paying jobs.
So it is easy to understand why they lapped up the promises of injections of taxpayer cash combined with muscular protectionism. But this is alien territory for a Conservative government, supposedly the party of free markets — and is a policy with a chequered history.
Now comes the hard part: repaying that faith. We have seen the early evidence of this policy in action already, with the £400m acquisition of a 45% stake in OneWeb, the bust satellite operator. That deal was the brainchild of Dominic Cummings, the prime minister’s now former senior adviser. The hope is that OneWeb’s satellites can be used to connect fibre-optic broadband blackspots in rural England, and develop Britain’s own satellite navigation system to rival the European Galileo system and America’s GPS.
Yet to some experts, this looks like a costly gamble doomed to failure. So concerned was Whitehall with that deal that it insisted on a rare ministerial direction from business secretary Alok Sharma — the equivalent of the civil service washing its hands of it.
If you want a salutary reminder of the pitfalls of a state-sponsored technology arms race, a trip to south Wales is not a bad place to start. In the 1990s, Britain was desperate to attract Asian companies to these shores. The government persuaded South Korean giant LG to open a plant in Newport in 1996, promising to create 6,100 jobs; in return it was handed a grant of £200m. Japan’s Fujitsu was lured to open a factory in Newton Aycliffe in Co Durham in 1991. But both collided with economic realities: the crashing price of electronics, from LCD screens to semiconductors. Fujitsu closed its factory in 1998 and LG quit Newport in 2006. Westminster bet against globalisation and was found wanting.
Yet just a few miles away from the failed Fujitsu plant is an example where state aid can go right. The Nissan factory in Sunderland opened in 1986 with a generous helping of regional aid, and has been one of the great industrial success stories, as I report elsewhere.
Airbus’s factories in Filton and Broughton are also examples of how state aid can work. The government was a reluctant investor in the Airbus consortium at its formation in 1969; scarred by its involvement in — and the taxpayer cash thrown at — Concorde, it initially refused to join. Eventually it did — and its subsequent investments in Airbus, via “repayable launch aid” for specific planes, have paid dividends. The initial investment in the A320 proved so lucrative that Airbus eventually had to persuade the government to take a haircut on its holding in return for more work on future projects.
That question of state aid is likely to be posed again soon, as Covid-19 scythes through once-healthy businesses of strategic significance, especially as lockdowns spread. The green book, the Treasury bible on how to invest, has been amended so that more weight is placed on supporting neglected areas.
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When it comes to a business such as Rolls-Royce, the Derby jet engine-maker whose crashing shares and swollen debt pile leave it in a perilous position — or a target for a cash-rich US predator — there should be no hesitation in intervening.
When a cash-strapped Airbus comes calling for support to develop the next generation of low-emission aircraft and wings, a similar decision should be made. Getting back around the table as a shareholder is wishful thinking in a post-EU world, but would give the government crucial influence just as the aerospace giant faces huge decisions on future tech, and Hamburg tries again to grab work from its Welsh wing factory.
And if Boris Johnson is serious about sustaining an automotive industry that can survive beyond the combustion engine, he could do worse than inject funds into battery factories and target aid to attract electric car parts suppliers.
But where do you draw the line? Taxpayer funds are under a pressure never seen before, and the government has a patchy record when it comes to picking winners.
The deal agreed with Europe will not allow ministers a completely free hand when it comes to doling out state cash to support private enterprise. France, fond of state aid itself, wants checks on Britain’s use of the stimulus. The UK will still be subject to common binding principles that will prevent it from giving distorting bungs, and recourse for the EU to recover illegal subsidies.
Another problem, as evidenced by OneWeb, is with the prime minister himself. He is so keen to be popular, and so open to special pleading, that he risks throwing away taxpayer cash on pet projects, rather than supporting viable and promising causes where there is a serious strategic case.
The biggest role of government here should be as a helping hand for business, providing an initial boost if needed, or helping it get over big investment hurdles such as a completely new technology, but then stepping back to let innovation and enterprise take over.
Picking winners is fiendishly hard, but a good place to start is where we have a technological edge to begin with. Part of the problem is that you only find out if you’ve backed a winner years later.
Sir Charlie Bean drew parallels with the debt crises faced by Greece and Italy
MATT CARDY/GETTY IMAGES
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Surging inflation as the economy recovers from the pandemic could cost the government billions of pounds, a senior official at the Treasury’s spending watchdog has warned.
Sir Charlie Bean, lead macroeconomic forecaster at the Office for Budget Responsibility, said that a rapid recovery may drive up prices and force the Bank of England to raise rates.
Britain’s vast debt pile, now larger than the economy after the pandemic, leaves it vulnerable to changes in borrowing conditions. Higher rates would cause “the debt interest contribution [to] rise quite sharply”, potentially derailing government spending plans.
Drawing a parallel with Greece and Italy in the eurozone debt crisis, the former Bank of England deputy governor said that the chancellor could not afford to lose the confidence of markets and urged him to ensure that debt falls under the fiscal rules he adopts.
“One shouldn’t be content with simply stabilising debt-to-GDP,” Sir Charlie told The Times.
Low government borrowing costs have been a blessing this year, reducing the cost of servicing the national debt by up to £20 billion a year despite the extra £560 billion of borrowing projected over the parliament.
This year alone the government is borrowing £394 billion to protect jobs and businesses, a peacetime record of 19 per cent of GDP. OBR models show that a 1 percentage point rise in interest rates, market rates and inflation would add £23 billion to annual debt service costs, equivalent to just under half the defence budget or 4p on income tax.
Sir Charlie, 67, cautioned the chancellor against relying on low rates to manage the public finances and set out scenarios under which servicing Britain’s £2.2 trillion of debt pile becomes cripplingly expensive.
Inflation is below the Bank’s 2 per cent target at 0.9 per cent at present but he warned that one source of rate rises “would be through inflationary pressure as the economy rebounds”.
If markets decide that the government does not have a credible plan for the public finances, or a firm commitment to control inflation, investors will start demanding a “higher risk premium” on sovereign debt that makes it more expensive for the state to borrow.
