CRITICAL READING YEAR 13!

NOT because the author is a Brexiteer, but because the points he makes, connecting different economic issues, work very effectively as analysis and evaluation. If you can stitch together the various elements he puts in here, you will be able to answer questions to do with this area (trade blocs, economic union, single currencies) more effectively - as well as understand one of the critical issues of toady:

We have just passed the euro’s 20th anniversary. I am not going to rehearse the ways in which the euro has been a disaster. Instead, I want to ask why it was formed in the first place and how European elites failed to perceive the pain that it would bring. The answers have important lessons for us now, as we contemplate our future relationship with the EU. 

From the beginning, the formation of the euro was seen by the European elites as part of the political project of integration, leading eventually to a federal European state. It was widely believed that sharing a common money, with all its implications for interest rates, fiscal policy and umpteen other things, would be both an expression of European unity and a major force for cementing it.

Once it subsequently became clear that the economy of the eurozone was experiencing considerable difficulties, it was common for European political leaders to claim that, as a political project, it had always been recognised that the formation of the euro would bring serious economic costs.

They argued that these had to be borne in order to achieve the political objective. Indeed, some went further and claimed that without the euro the whole EU edifice might collapse. The implication was that although things might seem pretty grim in a number of eurozone members, this was a necessary price to pay.

But this notion was complete bunkum. Although the primary motive for forming the euro was political, before its formation, key European leaders trumpeted the supposed economic benefits of the single currency. They believed that it would bring significant gains through a reduction of transactions costs and uncertainty, the deepening of financial markets and the imposition of good economic governance. 

Where did they go wrong? Right at the beginning. The politicians and officials driving the European project generally understood very little about economics. 

Indeed, it has to be said that quite a few of their supporting economists apparently understood little about economics either. The most significant error was to believe that it was the deutschmark that gave Germany its overbearing position in Europe. Take that away and Germany would be cut down to size, and Europe would become more balanced and harmonious. 

This was a misconception. In fact, it was precisely the deutschmark that kept Germany in check. Then, as now, Germany had a decided tendency towards tremendous success with its exports, combined with over-saving.

If left unchecked, this would lead to an enormous German current-account surplus, forcing other countries into deficit.

A rising deutschmark was the mechanism that prevented this from happening. The higher German currency both attenuated the strength of German exports and, by keeping down the costs of imports, increased German workers’ real incomes, which they largely spent.

The euro has robbed the European economy of this crucial adjustment mechanism. The result is a German current-account surplus approaching 8pc of GDP, alongside slow growth of German real wages and sluggish growth of consumers’ expenditure. Combined with enforced austerity in the deficit countries, this has imparted a strong deflationary force to the European economy, reminiscent of the Gold Standard in the 1920s and 1930s.

There were three other key misjudgements. First, euro supporters greatly overestimated the gains from reducing transactions costs and uncertainty about currency values. In the modern world, companies are readily able to deal with such costs and uncertainties. So the gains from monetary union have been tiny.

Second, they greatly overestimated the ability and willingness of all eurozone member countries to adjust their price and wage setting and to reform their economic structures to enable them to cope with a fixed exchange rate. So the losses have been huge. 

Third, they did not understand the implications of allowing debt ratios to rise significantly in countries which, once they had joined the euro, would no longer be able to issue their own money. As a result, Italy is heading for some sort of financial blow-up and possible default. So the system is seriously unstable.

Yet prior to the euro’s birth in 1999, in the debate in this country about whether Britain should join, most of the establishment – led by Tony Blair, the Prime Minister at the time – was strongly in favour. This group included the CBI, representatives of big business and the City, with support from the BBC, most major media outlets and large parts of the civil service.

They envisaged serious economic decline, or even disaster, if the UK stood aside. We now know that their views were comprehensively wrong.

Does this ring a bell? It should – an alarm bell. Now we stand on the brink of another momentous decision. And the same people are still peddling the same sort of nonsense.

 Yesterday’s “transactions costs and uncertainty” is today’s “border frictions and disruptions”. Yesterday’s supposed need for a common currency in order to make the trading union work is today’s supposed need for a “deal” with the EU in order to enable us to trade with it.

And there seems to be a blatant disregard of the facts. Contrary to what the Remainers blithely assume, the EU’s economic performance compared with other developed countries has been poor. This is for a good reason. The EU makes bad decisions.

Its institutions don’t work very well and it pursues a political agenda, either ignorant of the economic costs or oblivious to them. The euro is creaking and the European elites are hurtling towards more disastrous decisions. Meanwhile, the EU falls further behind the rest of the world.

We escaped membership of the euro by the skin of our teeth. We now need to grit those teeth to escape fully and finally from the very entity that conceived of the euro monstrosity in the first place. In case you were in any doubt, Mrs May’s capitulation of a “deal” would bring not a full and final escape, but rather a further entrapment.

Roger Bootle is chairman of Capital Economics;  roger.bootle@capitaleconomics.com

What's happening in Germany?

Bit of a trawl through data, but some key nuggets for you (highlighted); you have to read it all to understand it, but the last section is very clear:

The outlook for the economy of Germany has plenty of dark clouds

Posted on January 9, 2019

Sometimes it is hard not to have a wry smile at the way events are reported. Especially as in this instance it has been a success for my style of analysis. If we take a look at the fastFT service we were told this yesterday:

German industrial production unexpectedly drops in November.

My immediate thought was as the German economy contracted by 0.2% in the third quarter we should not be surprised by declines. Fascinatingly the Financial Times went to the people who have not been expecting this for an analysis of the issue.

German data released over the past two days have painted a glum picture for how Europe’s biggest economy performed during the latter part of 2018. fastFT rounds up what economists and analysts have said about what is happening. Anxieties over global trade wars and political uncertainty in the eurozone have taken their toll, and Europe’s powerhouse is showing signs of fatigue. Questions of whether a recession is looming have also been raised, while many economists remain cautiously optimistic in their prognosis.

If we now switch to what we have been looking at I wrote this on December 7th about the situation.

If we look at the broad sweep Germany has responded to the Euro area monetary slow down as we would have expected. What is less clear is what happens next? This quarter has not so far show the bounce back you might expect except in one area.

So not only had there been an expected weakening of the economy but there had been at that point no clear sign of the promised bounce back. What we know in addition now is this which was released on January 3rd.

• Annual growth rate of broad monetary aggregate M3 decreased to 3.7% in November 2018 from 3.9% in October
• Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 6.7% in November, compared with 6.8% in October

So another decline and if we look for a trend we would expect Euro area growth to continue to be weak and this time around that is being led by Germany. The link between monetary data and the economy is not precise enough for us to say Germany is in a recession but we can expect weak growth at best heading into the early months of 2019. The FT does to be fair give us a brief mention of the monetary data from Oxford Economics.

lending growth remaining robust

The problem with that which as it happens repeats the argument of Mario Draghi of the ECB is that it is a lagging indicator in my opinion as banks respond to the better economic news from 2017.

As these matters can be heated let me make it quite clear that I wish Germany no ill in fact quite the reverse but the money supply data has been clear and has worked so far. Frankly the way it is still being widely ignored suggests it is likely to continue to work.

This week’s data

Trade:

This morning’s release started in conventional fashion as we got the opportunity to observe yet another trade surplus for Germany.

 Germany exported goods to the value of 116.3 billion euros and imported goods to the value of 95.7 billion euros in November 2018………The foreign trade balance showed a surplus of 20.5 billion euros in November 2018. In November 2017, the surplus amounted to 23.8 billion euros. In calendar and seasonally adjusted terms, the foreign trade balance recorded a surplus of 19.0 billion euros in November 2018.

In world terms an annual decline in Germany’s surplus is a good thing as it was one of the imbalances which set the ground for the credit crunch. But if we switch to looking at this on a monthly basis this leapt off the page at me about imports.

-1.6% on the previous month (calendar and seasonally adjusted)

A fall in imports is a sign of a weak economy as for example we saw substantial falls in Greece back in the day. There are caveats to this of which the biggest is that monthly trade data is inaccurate and erratic but such as the numbers are they post another warning. The other side of the balance sheet was more conventional in that with current trade issues one might expect this.

also reports that German exports in November 2018 remained nearly unchanged on November 2017.

Let us move on by noting that due to the way that Gross Domestic Product or GDP is calculated lower imports in isolation provide a boost before a “surprise” fall later as it filters through other parts.

Production

If we step back to Monday there was some troubling news on this front.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in November 2018 a seasonally and calendar adjusted 1.0% on the previous month.

So not much sign of an improvement and it was hardly reassuring that geographically the issue was concentrated in the Euro area.

Domestic orders increased by 2.4% and foreign orders decreased by 3.2% in November 2018 on the previous month. New orders from the euro area were down 11.6%, new orders from other countries increased 2.3% compared to October 2018.

Then on Tuesday we got disappointing actual production numbers.

In November 2018, production in industry was down by 1.9% from the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). The revised figure shows a decrease of 0.8% (primary -0.5%) from October 2018.

So November has quite a fall and this was compared to an October number which had been revised lower. This meant that the annual picture looked really poor.

-4.7% on the same month a year earlier (price and calendar adjusted)

Business surveys

At then end of last week we were told this by the Markit PMI ( Purchasing Manager’s Index) at the end of last week.

December saw the Composite Output Index fall for the fourth month running to 51.6, down from 52.3 in
November and its lowest reading since June 2013.
The latest slowdown was led by the service sector, as the rate of manufacturing output growth strengthened for the first time in five months, albeit picking up only slightly and staying below that of services business activity.

The problem for Markit is that rather than leading events they are lagging them as they are recording declines after the economic contraction in the third quarter. If we took them literally then the economy would shrink by even more this quarter! Anyway they no seem to be on the case of the motor industry. From yesterday.

Latest data indicated a worsening downturn in the European autos sector at the end of 2018. Production of automobiles & parts fell for the third month running, and at the fastest rate since March 2013. New orders fell sharply, with new export business (including intra-European trade) declining at the fastest rate in six years.

Comment

The German economy found itself surrounded by dark clouds as 2018 developed and as I am typing this we have seen more worrying signs. From @YuanTalks.

It’s the FIRST YEARLY DROP in at least 20 years. Passenger car sales slumped 19% y/y in Dec 2018 to 2.26 mln vehicles.

Over 2018 as a whole car sales fell by 6% so we can see the issue is accelerating and there are obvious implications for German manufacturers. It has been accompanied by another generic sign of possible world economic weakness from @LiveSquawk.

Exclusive: Apple Cuts iPhone Production Plan By 10% – Nikkei $AAPL

Suddenly there is a lot of concern over a German recession or as it is being described a technical recession. In case you were wondering that means a recession that is within the error range of the data which actually covers most of them! Because of these errors it is hard to say whether the German economy grew or contracted at the end of last year, as for example wage growth should support consumption. But what we can say is that the broad sweep from it to the like;y trend for the early part of 2019 is weak. Perhaps some growth but not much after all even 0.2% growth in the final quarter would mean flat growth for the second half of the year.

For those who think ECB policy is set for Germany this poses quite a problem as it has ended its monthly QE purchases just as things have deteriorated in a shocking sense of timing. But to my mind just as bad is the issue that my “junkie culture” theme that growth was dependent on the stimulus also gets a tick including something of a slap on the back from Mario Draghi who seems to have come round to at least part of my point of view.

I’ll be briefer than I would like to be, but certainly especially in some parts of this period of time, QE has been the only driver of this recovery.

According to Handelsblatt every little helps.

Germany has saved €368 billion in interest costs on its debt thanks to record low interest rates since the financial crisis in 2008, according to Bundesbank calculations. That’s more than 10% of annual GDP.

Competition & Productivity - The Economist

Another good article on competition and its impacts on economics. The whole article is worth reading, but the bit that works for an essay on oligopoly and/or productivity is highlighted towards the end.
Free exchange

Central bankers grapple with the changing nature of competition

This year’s Jackson Hole meeting was a chance to study market concentration

 Print edition | Finance and economics

Sep 1st 2018

RECENT visitors to Jackson Hole, a resort in the Teton Mountain range in Wyoming, were denied the usual scenic views by a shroud of smoke from recent forest fires. Disappointing, no doubt, for the tourists among them—but oddly fitting for the economic panjandrums attending the Federal Reserve Bank of Kansas City’s annual symposium on August 23rd-25th. Not only are economic policymakers used to making choices in a fog of uncertainty, but this year’s theme of market structures generated its own haze. Though the nature of competition in America’s economy is changing, it is unclear how worried they should be.
Jerome Powell, the chairman of the Federal Reserve, highlighted slow wage growth in recent decades. America seems stuck in a “low-productivity mode”, he said. Others pointed to sluggish investment, despite cheap capital, and a fall in workers’ share of national income. Could these ills share some common causes, namely rising market concentration and crimped competition?

Latest stories

• Binyamin Netanyahu’s battle for survival

  MIDDLE EAST AND AFRICA18 HOURS AGO

• The year in obituaries

  OBITUARIESA DAY AGO

• Sister Wendy Beckett made a difficult combination seem effortless

  ERASMUS2 DAYS AGO

• “Roma” reflects on Mexico’s past, and its present

  AMERICAS2 DAYS AGO

• The best letters from our readers in 2018

  2 DAYS AGO

• On the origin of Christmas ditties

  ERASMUS5 DAYS AGO

See more

As evidence, Alan Krueger of Princeton University pointed to nominal wage growth that is 1-1.5 percentage points lower than would normally be expected with inflation and unemployment as low as they are now. He laid some blame on employers’ growing power, as no-poaching agreements and non-compete restrictions proliferate, on sickly union membership and on the falling real value of the federal minimum wage.

Antoinette Schoar of the Massachusetts Institute of Technology (MIT) remarked that a banking shakeup by fintech upstarts, long predicted, has not fully materialised. Rather than turning new firms into viable competitors, venture capital seems to have nurtured them only for incumbents to gobble them up. As markets have become more concentrated, observed John van Reenen, also of MIT, the gap in productivity between the biggest and smallest companies has widened. If something is stopping substandard firms from closing the gap, that could be sapping the economy’s dynamism.

These concerns fit into a dark story, of an economy weakened by behemoths abusing their market power. But there is a competing narrative. Consider the Jackson Hole conference itself, stuffed with star academics and policymakers. Is it an incumbent monopolist, resting on its reputation as the year’s hottest macroeconomic event? Or is it a shining example of the power of network effects, convening great minds to produce ideas jointly that surpass anything they could dream up separately?

Rising market concentration, Mr van Reenen pointed out, might reflect not a decline in competition, but a change in its nature. Platforms such as Google, Uber and Airbnb match buyers and sellers, and thus make outsize gains as they grow. In such winner-takes-most competition, a slight advantage can tip the entire market in a company’s favour. Mr van Reenen finds that America’s rising economic concentration is mostly caused by big, productive companies gaining market share. Far from growing complacent and fat, they seem impressively muscular.

Other observations chimed with this narrative. Alberto Cavallo of Harvard University showed that the prices of goods sold in brick-and-mortar shops vary less by location and are updated more often if they are also sold by online rivals. Prices of shops’ products were much more likely to reflect changes in exchange rates if the same items were sold on Amazon. Such cost-sensitivity is hard to square with the idea that competition is lacking.
The differences between these rival narratives matter for economic policymakers. In one version nefarious market forces are constricting productivity, holding down investment and wages. If so, that would make the trade-off between inflation and unemployment harder to manage. In the other, restrained investment and wages are signs of structural changes that boost productive potential—in which case, there would be fewer ill-effects from running the economy hot.

Two economists, three opinions

Unsurprisingly, given the number of economists assembled, the only point of agreement was on the need for more evidence. Part of the difficulty is that the two narratives are not as distinct as they appear. As Janice Eberly and Nicolas Crouzet of Northwestern University pointed out, the same forces could be creating both competition-harming barriers to entry and rising productivity associated with economies of scale. They find a correlation between a company’s market share and its investment in patents, algorithms and other intangible capital.

Moreover, the impact on competition seems to vary by industry. In retail and manufacturing, although concentration and intangible investment have risen, the researchers’ measure of price markups has stayed low. By contrast, in the high-tech and health-care industries, they find an association between intangible investments and markups. Even as sophisticated logistical algorithms sharpen the battle between the likes of Amazon and Walmart in retailing, in other words, a proliferation of patented devices and databases full of customer insights could be enabling market leaders in pharmaceuticals and finance to shut rivals out.

Raghuram Rajan of the University of Chicago offered another reason to wait before declaring increased economic concentration either good or bad for the economy overall. Even if superstar companies are passing efficiency gains on to consumers now, they may not keep doing so indefinitely. If they continue to be boosted by the trends behind economic concentration, from stellar returns to amassing troves of customer data and the increasing sophistication of proprietary software, their pricing forbearance may not last. Once their dominance is secure, they could turn predatory, milking consumers and squeezing innovative potential from the broader business environment. The economy has changed a lot in recent years—and there is no reason why it cannot keep changing.

This article appeared in the Finance and economics section of the print edition under the headline"Made from concentrate"

Useful short article on productivity - and data deficiencies:

Daily Telegraph again; key point is that the method of measurement has been adjusted, not that productivity has suddenly improved:

The economy may be on a significantly better footing than previously thought after a new study of productivity suggested the UK has been cast in an unflattering light.

Britain had been thought to be around 24pc less productive than the US, but under new measurements by the OECD think tank the gap falls to 16pc.

The new study suggests that living standards in the UK are not in as much danger of falling behind those of similar economies, and is a positive sign for British competitiveness as well.

The new reading also means that the UK is more productive than Italy. The gap with France shrinks from 18.6 percentage points to 10.7 points, and that with Germany declines from 21.9 percentage points to 14 percentage points.

Productivity is typically measured as economic output per hour worked. High productivity is crucial to long-run prosperity; as more goods or services are produced by each worker every day, prices can fall and wages rise.

The key difference in the new study came in estimates of the number of hours worked.

Usually each country comes up with the best numbers it can for GDP and for hours worked, which are used by the OECD to compare between nations.

However, the UK typically makes little adjustment to the number of hours worked reported in the Labour Force Survey.

Other countries, by contrast, often make changes that reduce the total estimate. As a result the UK is left with more hours worked for the same output, making its productivity look worse.

When measured on a consistent basis, this relative overestimate of hours worked is removed and a fairer picture of productivity is generated.

“Countries making no adjustments to 'average hours worked' measures extracted from the original source appear to systematically overestimate labour input and, so, under-estimate labour productivity levels,” said the OECD report.

“The results point to a reduction in relative productivity gaps of around 10 percentage points in many countries compared to current estimates.”

It removes a significant part of the puzzle of why British productivity has lagged its neighbours’ output.

However this does not do anything to counter the data that show productivity has struggled to grow over the past decade.

“While these new results are striking, the UK’s labour productivity still lags behind many of its largest international competitors,” said Richard Heys, deputy chief economist at the ONS.

“In addition, these improved figures don’t provide any explanation for why productivity growth has been so stubbornly low since 2008. So, while this analysis significantly narrows the ‘productivity gap’, the efforts to solve the ‘productivity puzzle’ and understand the rest of the ‘gap’ will continue.”

Taxation - good evaluation points:

From the IEA in the Daily Telegraph:

Britain's tax take is at a 30-year high, so where is all the money coming from?

 Tim Wallace 

12 DECEMBER 2018 • 1:14PM

Britain’s ability to attract successful companies and talented people has rarely been as important to its future prosperity as it is right now. As Brexit trade arrangements remain uncertain and global economic growth seems to be weakening, the country’s preparedness for what lies ahead is crucial if it is to flourish.

There is a widespread perception that Britain, unlike countries such as France or Sweden, is a low-tax nation, with a small state and a preference for keeping the tax burden as low as possible to boost growth and attract investment.

In reality, the tax burden is at a 30-year high as a share of GDP. So, with that in mind, how much tax do Britons really pay? Where is it all coming from? And how does it compare internationally?

Taxes amounted to one-third of GDP last year, according to the Organisation for Economic Co-operation and Development (OECD).

That is the highest level since 1988 and above average for the past 50 years.

Use regions/landmarks to skip ahead to chart and navigate between data series

The UK tax haul is at a 30-year high - but the rest of the world has raised revenues more rapidly in recent years. Source: OECD

Long description.

No description available.

Structure.

Line chart with 2 lines.

The chart has 1 X axis displaying values.

The chart has 1 Y axis displaying Tax revenues as % of GDP.

View as data table.

Chart graphic.

When the OECD began to compile records in 1965, the UK’s tax burden amounted to 30.1pc of GDP, while the OECD average at the time -  a smaller group of countries than it is today - was 24.9pc.

The country's tax-to-GDP ratio remained around this 30.1pc figure, and above the OECD average, up to the end of the 1980s. At this point, the nation enjoyed a period of relatively low taxes, which lasted through to 2000.

At the turn of the millennium, roughly coinciding with New Labour coming into power, tax-to-GDP began to rise again, to a level nearly on par with the average for a rich-world economy like Britain's.

Last year, taxes accounted for 33.3pc of GDP, compared to the 34.2pc average across the OECD's 35-nation club of wealthy countries.

At first glance, this would appear to suggest that the UK's tax take is below many of its peers. But look closer, and the picture is different. Tax-to-GDP has risen sharply across much of the rich world, and the only reason Britain comes in below average is because other nations have ramped up their tax take even more quickly than the UK - to record highs, in fact.

Where are we taxed, and by how much? 

Income taxes made up around £186bn of revenues for the Exchequer last year, on the OECD’s measure.

This amounted to 9.1pc of GDP - above the OECD’s 8.3pc average, but below the UK’s long-running level of around 9.7pc. 
This is partly thanks to increases in the tax-free allowance, which is how much money people can earn before they start paying tax, and a gradual rise in the level of income people earn before having to pay the higher rate of tax.

By raising the threshold at which income tax is paid, millions of workers have seen their income tax bills fall.

Social security contributions - including national insurance - raked in another £130bn last year. Employees paid 2.5pc of GDP on this while employers spent 3.7pc.

VAT is another big chunk of the tax take. Sales taxes brought in £139bn last year.

At 6.8pc of GDP, VAT is almost precisely in line with the OECD’s average, and has risen slowly but steadily as a proportion of the economy since the 1970s.

Property taxes are also on the up, contributing £85bn to the Treasury last year. This is equal to 4.2pc of GDP, the highest level since 1989.

It is also more than twice the OECD’s average of 1.9pc of GDP, running counter to the oft-heard claim that property here is taxed lightly. In fact, this level of property taxation is close to that of the US and France.

It is not only higher tax rates that boost the tax take, however. Government revenues tend to peak at the top of the economic cycle when growth is strongest. Confident consumers spend more, boosting VAT revenues. Pay rises push workers into higher tax brackets, adding to the Treasury’s haul. Companies’ earnings rise. The global upswing last year will have contributed to a higher tax intake.

What do taxes do to the economy?

Julian Jessop, chief economist at the Institute of Economic Affairs, puts it nicely when he says: “If you tax the profits of companies, you are taxing jobs, you are taxing investment, you are taxing all sorts of things which you don’t necessarily want to."

He continues: “You encourage companies to locate in your country. They might pay less tax than if the rates were higher, but the people they employ will earn more, the companies in supply chains will benefit, they will spend more on local services. You need to view the whole thing in the round.”

Some countries, such as Ireland, have extremely low rates of corporation tax. The UK has cut the headline rate of corporation tax in recent years, from 28pc in 2010 to 19pc now, in a bid to become more competitive in the aftermath of the financial crisis.

As Jessop explains, high corporation tax is counter-productive and curtails growth, but this is also true of other forms of taxation.

Indeed, Governments use tax rises precisely for this purpose, to prevent growth in areas they might deem harmful, such as alcohol, tobacco or diesel. 

Governments also tend to reverse tax increases when they see the damage it does to the economy. France, for instance, scrapped its 75pc top rate of income tax and lowered its wealth tax because it led to a mass exodus of high earners.

A recent hike in property taxes in Britain, particularly on homes worth more than £1.5m, appears to be hitting the housing market.

Stamp duty bills on home sales can easily run into the tens or even hundreds of thousands of pounds and the Government has enjoyed rising revenues from this tax as property prices have soared.

But in a less confident market, with Brexit uncertainty looming, the US-China trade war showing no sign of abating, and the general outlook for the global economy fragile, the higher level of tax is just an extra barrier to moving, which may be putting off many would-be buyers. 

An additional levy on landlords and second-home owners has flattened the market even more.

As a result, prices in many parts of the country are stagnating, particularly in upmarket neighbourhoods in London that had previously enjoyed double-digit increases each year. Transaction levels have fallen through the floor and suddenly tax revenues from stamp duty are down as a result.

Fundamentally, Jessop says politicians and civil servants and, to some extent, the general public, must recognise that tax increases do more harm than good because they harm a country's competitiveness and they should not be a means to raising money quickly.

“The tax burden is high and expected to remain high. All of the debate seems to be about whether taxes should rise further, not go down,” he says.

“You see it across the board, for example in what could be done with £39bn instead of giving it to the EU - the debate is all about spending it rather than cutting taxes. There is something in the psyche that if you get more money in, you should spend it, but that mindset needs to change. Cutting tax rates can end up yielding more money for the Treasury."