july 2016 toscafund economic update issue 37

TOSCAFUND Economics August 2016 Issue 37 – Here’s to a more measured view of the UK economy

1. A reflection on the recent poor PMI & their ever poorer interpretation Purchasing managers are human. Before the vote all of us, including them, were repeatedly and forcefully told that Brexit would hit demand. The same fear has been voiced continuously since. No surprise then that purchasing managers have opted to purchase significantly lower new stock for their firms. They have done so just as their superiors have been individually buying shares in the firms they sit on the board. Welcome to the Paradox of Amalgamation.

2. A balanced assessment of payments to and from the UK It is accepted by many, almost as an axiom, that for some years the UK has been in a critical balance of payments position, one which has been growing ever more desperate and approaching a dramatic economic denouement. I cannot agree and explain why.

3. Labouring another data point The UK does have a labour productivity problem; the problem is in measuring output per person in our proto-type service economy.

4. A welcome Deliveroo-lution Based in London’s Soho, Deliveroo began as an online delivery company. Whilst it may not have appeared terribly original in using self-employed bicycle and motorcycle couriers, it is unlike its close rivals Just East, Hungry House et al in not simply taking food orders but also facilitating its delivery. Thanks to Deliveroo and its imitators multiple sectors are enjoying improved utilisation of their resources, including labour.

5. A positive power signal We were recently ‘shocked’ by the eleventh hour announcement that the otherwise imminent decision on developing a third nuclear power station at Hinckley Point would be delayed. This has been interpreted in a number of unflattering ways to the United Kingdom’s economic future For me it was perfectly sensible to reassess what was a bad deal for Britain.

6. A welcome Devolution Revolution Wealth varies place by place for reasons which we will never overcome. It also varies because of factors which we can tackle through targeted policies and strategies. And I would maintain that outside of the EU we can narrow the element of spatial wealth dispersion which can be addressed.

7. Brexit II – Brexit would turn devolving doors (June 2016) Some see the treatment of people with uniformity as fair. Others by stark contrast see any failure to distinguish between ability and need as the root of unfairness. Very often those pursuing one of these lines of reasoning find themselves inadvertently supporting the other. From my standpoint I see no reason why the UK should have a nationwide tax structure.

8. Brexit II – Welcoming of our tax disharmony when outside the EU (June 2016) The United Kingdom is on the cusp of a devolution revolution. It should use this metamorphosis to transform its tax system by shifting away from income tax to spending based taxes; far easier to capture in our close-to-cashless economy. The case for sales based taxation is all the more compelling if rates are allowed to vary across the country and to differ according to the nature of the goods and services being consumed.

9. Issue 14 – London’s homes under the hammer (June 2012) The Evening Standard and Financial Times recently ran stories that warned of an impending correction in prices for homes across London. Whilst it is true property has become uncomfortably expensive for many Londoners it is enticingly cheap and attractive to a great many buyers from overseas.

Author: Dr Savvas Savouri

Contact information Toscafund Asset Management LLP 90 Long Acre London WC2E 9RA England

t: +44 (0) 20 7845 6100 f: +44 (0) 20 7845 6101

e: [email protected] w: www.toscafund.com


Preface: The batting average effect

Through this piece I draw upon varied observational fallacies and paradoxes which have been analysed, chronicled and assessed by statisticians, psychologists and economists and their relevance to where the UK finds itself since the momentous events of June 23rd. Ahead of these I would like to provide my very personal view of the incumbent members of the UK’s Monetary Policy Committee and do so by comparison to earlier ensembles.

As harsh as it may seem, I am of the opinion that for some time now the MPC’s quality has been in decay. This is not to claim that each Committee cohort is low in some absolute sense, but rather not as high as the collection before, certainly on a slide in quality over recent years.

Just as with batsmen in a cricket team getting worse as you move down the “order” or the quality of a rugby team falling as you go from the first XV to the second, third XV etc, so too with the MPC. When it was first formed the MPC had a universe to choose from which allowed it to appoint some of the best academic and commercial monetary economists possible. The Governor was Eddie George. There was also Mervyn King, as well as Charles Goodhart and Willem Buiter. These were true Titans as practical and theoretical economists. A decade later when the UK was hit by the Global Financial Crisis the MPC had the benefit of Charlie Bean and continued to boast Mervyn King. I have no doubt these were instrumental in ensuring the base rate was cut from 4.5% to 3% in one speedy and timely move in the meeting of November 2008. Their knowledge is also sure to have contributed greatly to our engaging in Quantitative Easing. Fast forward to where we are now and we have neither a particularly good Governor chairing the MPC or impressive members around him, either internal or external. No surprise then that the recent meeting resulted in such unnecessary monetary loosening.

Do not get me wrong, the MPC’s actions – and the effect they have had to further weaken the pound – cannot fail to stimulate the UK economy. My point is that it is not in need of any additional stimulus, having already seen a competitiveness enhancing move lower in sterling, a compression to Gilt yields and the removal of the 0.5% counter-cyclical buffer from bank reserves. These monetary stimuli alone would have been favourable enough, and yet we known that fiscal stimuli are coming too from October; tax cuts and boosts to spending. Moreover we have had almost universally positive corporate news since June 23rd, the likes of Siemens, Boeing, Ineos, Softbank, Wells Fargo, McDonalds, Amazon et al committing to investment in the UK.

I am convinced that had we now had an MPC of the quality of the 1998 or 2008 calibre (see Appendix 2), it would have voted almost unanimously to keep policy unchanged until it met on September 15th, by which time it could have made a reasoned response to post-referendum labour market and trade data, as well as figures for manufacturing, retailing and construction.

Let me close by reflecting on the fact that we can at least boast a ‘First-Class III’ at the OBR, one of whose trinity is Stephen Nickell who graced the MPC from June 2000 until May 2006, during its truly “Golden Period”, as opposed to its current Leaden one. There is also the OBR chair Robert Chote, who held his own counsel ahead of the referendum, and continues to stick to a reasoned silenced, only breaking it to make clear on June 30th that the OBR would not make any growth forecasts until the Autumn. If I were to make a prediction it would be that we will most likely find the base rate back at a 0.5% within a year. I make this claim not because I expect a surge towards and above 3% inflation to trigger a volte face, but rather a realisation that the UK economy never needed the base rate to be cut or the ancillary other monetary measures it has just received.


1. A reflection on the recent poor PMI & their even poorer interpretation

In what follows I will call upon the ‘Fallacy of Composition’ to argue that just because purchasing managers have cut their

purchases along the supply-chain this does not mean there has been a general decline in final consumption or a general lack

of purchasing.

Purchasing managers are human. Before the vote all of us, including them, were repeatedly and forcefully told that Brexit

would hit demand. The same fear has been voiced continuously since. No surprise then that purchasing managers have opted

to purchase significantly lower new stock for their firms. And in not buying they have badly affected the entire supply chain,

hence the poor Markit PMI’s.

Now assume, as I do, that final demand has held up much better than we were told it would. In fact the Bank of England’s

monthly survey of its regional agents which was released on Wednesday 20th, found no evidence of a general slowdown. The

survey is extensive and is known as the Bank’s “eyes, ears and voice”.

The reality is that the UK economy has been drained of its inventories, as it was in the immediate aftermath of 2008. Back

then, purchasing managers were paralysed by fear, as we all were in fact. As we know the Bank of England acted quickly in

loosening policy and the pound went down. We also know the Government of Gordon Brown spent aggressively and

loosened fiscal policy (although VAT did rise and a 50% tax rate was introduced). We know with hindsight that the economic

downturn post 2008 was not as deep or as long as was feared, no triple dip, but one. Because it was far less bad than we all –

including Purchasing Managers – were told it would be, there wasn’t enough stock to meet demand. The result was a frantic

dash to rebuild depleted inventories and this meant pricing power to those with stock to sell, and it was reflected in a surge

in the PMI. Rather, however, than this inflation shock being unwelcome it was favourable, since it helped us avoid falling into

deflation, which was the greatest risk post the 2008 crisis. And the collapse in inventories helped spring the economy

upwards. We have the same thing set to unfold with a few even more favourable differences. The economy has not been hit

by a banking collapse as it was in 2008; this is quite honestly a crisis only in our heads, and heads quickly clear. Crucially, this

time the policy response looks like being unconditionally loose; no VAT or tax rate hikes. Chances are in fact that Phillip

Hammond’s “reset” Autumn Statement will indeed “reset” diaries by bringing Christmas early. This means we will very likely

see a V shaped move in the PMI (whose sampling basis is hardly that extensive anyway, see Table 1).

I doubt, however, the doomsayers will give the rebound in the Purchasing Managers Index the same attention as they have

given to its recent sharp decline.

Table 1: Comparison of Markit PMI coverage with ONS measures and size of actual universe being surveyed

Sector Markit PMI survey size

Random Sampling

ONS survey

size

Random Sampling

Markit coverage (as % of ONS)

Estimated no. of

businesses

Markit coverage (as % of all businesses)

Manufacturing 650 No 7,000* Yes 9.3

Construction 170 No 8,000* Yes 2.1 200,000 0.08

Services 700 No 23,000* Yes 3.0

Source: Markit website, ONS, Toscafund Note: *7,000 used in Index of Production and the Index of Manufacturing is a subset


1.1 Pareidolia, parallax and other misperceptions

Ask a random Briton living in the south of England whether they would welcome another runway to increase capacity and

competition, lessen air travel disruptions and potentially lower air fares, and the answers will most likely be an unequivocal

yes. Now ask the same person whether they would be happy to have it built near their home and one will receive a very

snappy rejection. Next ask ‘the man on the street’ whether he would like the UK to commit more spending on aid to

distressed parts of the world and the likely answer will be of course. Now address the question differently and ask whether

he would be willing to be taxed more to fund such spending and we will most likely receive a less enthusiastic response. The

reality is that how we perceive the public mood towards issues will be materially affected by how we ask the question. This is

a behavioural or psychological form of parallax, defined in the physical sense as the “difference in the apparent position of an

object viewed along two different lines of sight”. What is my point?

The recent PMI survey involved asking purchasing managers about their general view towards the UK economy in the

aftermath of the referendum. Well, having been repeatedly told that a Brexit result would produce a negative shock to it

they understandably repeated back to their questioners the negative outlook they had been told to expect (and for those

who voted Remain were no doubt convinced of). I would maintain that had the question been a very personal one

concerning their ongoing job prospects and their general behaviour post June 23rd, we would have received answers along

the lines of “no change” and “no change”. After all at the time of referendum the UK labour market was showing impressive

signs, with positive job creation, elevated vacancy levels and comparatively low rates of unemployment widely across the UK

(see charts 14, 15 and 16).

Having referred to parallax I would also like to invoke pareidolia the psychological phenomenon when on being stimulated

our minds imagine a pattern when none really exists. We have been told writ large that the UK faces a recession and this has

stimulated us into expecting one and so seeing recessionary events all around us. Some will claim that there are real reasons

to fear a recession; say because of a post-Brexit paralysis of investment and hiring. Others will add that even were there no

real risk the mere expectation of a recession will be self-fulfilling. Either way many will dismiss my claim we are witnessing a

phenomenon akin to pareidolia arguing the recession we are heading into will be very real indeed. Well, the idea that

manufacturers who have become markedly more competitive will fall into recession is absurd. So too the idea that hotels,

restaurants, theatres and others with an exposure to tourism and holidaymaking will fall into recession. Absurd to the fear

that those elements of the UK economy linked to the extensive university system are vulnerable. That recessions happen is

not what I am disputing. I have lived through enough of them to know they are very real and nasty when they happen. The

point is that each has had a real trigger, often a sharp increase in interest rates or more general tightening in monetary or

fiscal policy, and sadly all too often poor decision making from No.11. The point is that we have seen and will continue to see

the relaxation of both monetary and fiscal policy. And as for idea the recession shock will come from without if not within my

response is that beyond the EU there are plentiful economies whose growth performances will strengthen as their central

banks loosen monetary policy. The world economy is after more extensive and more robust than the European Union we

have quite rightly voted to exit.

Some may claim that I have overlooked the sharp decline in consumer confidence measured in the days after the

referendum. Well here too I would call upon distorted perspective or parallax. Confidence is after all a rather nebulous

concept. Indeed I find questions concerning confidence rather curious. Imagine for instance asking someone who has just

bought a lottery ticket whether they are confident of ever winning. If the answer is yes one would be tempted to mention

the de minimis probability of doing so. Alternatively if the answer is no, one would ask why they had gone to the trouble in

time and costs to buy the ticket? When asked about their confidence in the days immediately after June 23rd respondents

unsurprisingly parroted back what they had been told to believe concerning events. I would repeat the claim I made a

moment ago that had the question been how confident are you concerning your particular job we would have seen a far less

dramatic decline, if any decline at all. Let me stress that from the macro-economic perspective from which I view the UK

economy it has only been positively stimulated since June 23rd. Most notably it has been stimulated by a more competitive

currency, and crucially we have the prospect of even more stimuli ahead, both fiscal and monetary. Somewhat ironically, one

unexpected fiscal boost which might come the UK’s way is a decision on a new runway in the south of England and the go-

ahead of the expansion of London City Airport.


1.2 Anagnorisis & anosognosia

In the Greek language the word anagnorisis captures a revelatory moment. Outside of spoken or written Greek it is also used

in English narratives with the purpose of stressing a pivotal moment of discovery. I have chosen to point this word out

because I am convinced those who anticipate the UK economy is heading into ‘technical recession’ because of the

referendum result will have just such a revelatory moment forcing them to accept that nothing of the sort has actually

happened. Of course they will argue those like me who see no recessionary threat face our own pivotal moment of

anagnorisis. The date which no doubt many will mark in our diaries is the scheduled release on October 27th of the

preliminary GDP data for the UK economy capturing the three months July through to September (Q3). As much as the

release of this data will be an important moment I would stress that it will be revised in subsequent releases – there is always

a second (25th November) and then final figure. Not only do I believe the preliminary Q3 GDP figure will not be as dire as the

consensus will suggest, but I am certain that each revision to it will be upwards. Of course, I may be wrong. Well if I am

wrong, we have the prospect of the new Chancellor’s Autumn Statement to fiscally stimulate the UK economy adding to

whatever the Bank of England chooses to do in the months ahead and what George Osborne announced in his valedictory

statement in the days following the referendum. In fact one could argue we have already had our moment of anagnorisis,

namely when George Osborne failed to deliver his threatened emergency Budget with its feared tax rises and spending cuts.

Not only was that proven to be a pantomime threat but so too the claims made by Siemens, Boeing, GSK and other corporate

giants that they would not be comfortable investing in ‘Brexit’ Britain. In each case and many others from all corners of the

business world we have had anagnorisis that the commercial commitment to the UK remains strong.

Having referred to anagnorisis I would like to also make mention of anosognosia, which describes an exaggerated sense of

knowledge (a form of cognitive dissonance best captured by the Dunning-Kruger effect). We know that between those who

see Brexit as harming the UK economy and those welcoming its freedoms to grow all the more strongly, only one will be

proven correct from the moment of anagronisis. Those who are shown to have reasoned confidently but incorrectly will quite

justifiably be diagnosed as suffering from anosognosia.

PS It would be fare to say that the CBI’s “Monthly Distributive Trades Survey” hardly garners much attention when released;

hardly much attention that is until the release for July. This revealed a marked decline, the index falling to its lowest since

January 2012. Now, let me make clear that survey is far from extensive – covering a mere sixty six retailers – such that it

exhibits greater volatility than more quantitative and comprehensive measures of retail activity notably that produced official

by our National Statistics agency (survey of 900 largest retailers and a representative panel of smaller businesses). Indeed it is

noteworthy that the CBI plunged by more in late 2008 than the fall which was seen in official retail volumes. Another issue

which calls into question the veracity of the CBI survey is that it has failed to keep up with changing retail spending patterns,

notably the shift to online shopping. I have no doubt that as with the downwards post-referendum shock revealed by the

PMI series we will inevitably discover – have a moment of anagnorisis – that the CBI retail survey overstated the economic

impact of the referendum result.

Chart 1: CBI vs. ONS retailers survey Chart 2: ONS index of services and year-on-year

Source: ONS, Bloomberg, Toscafund

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1.3 Paradox, fallacy and the referendum

In trying to convince you why drawing general conclusions from specific data samples can prove extremely misleading I have

already called upon the Fallacy of Composition (whose converse is the Fallacy of Division). I claimed that recent extremely

weak PMI measures were based on very small samples, timed very close to the post-referendum trauma. I argued that they

were as badly representative of general economic conditions as opinion polls were of general voting intentions ahead of the

2015 General Election, and betting odds ahead of the Referendum in their respective cases. I now turn to an often

experienced instance of the Fallacy of Composition known as the Amalgamation or Yule-Simpson Paradox.

It is true we have seen a sharp post-referendum decline in a raft of Purchasing Managers Indices; across construction,

manufacturing and services. We have also ‘recorded’ large dips in other specific – invariably sentiment induced – measures.

No less true is the fact we have witnessed a surge in the purchasing of shares by individual Directors of FTSE350 firms, the

value hitting a more than ten year high. Specifically, £18.5m of capital was committed in their own companies by boardroom

members in the month following the momentous vote. Moreover, this figure is certain to have increased still further in July,

and will be interrupted only by the onset of ‘closed periods’ during which Director’s are not permitted to give away any

‘earnings signals’. Returning to the boardroom-buying that we have seen, the breakdown was £10.5m across the FTSE100,

versus £8.5m for FTSE250 firms (despite the former boasting a market-capitalisation over five times greater than the latter).

This puts the weight of buying disproportionally much greater on the FT250, which incidentally fell most in the aftermath of

the referendum and moreover has a company composition far better representative of the makeup of UK economy. Looking

into more detail property companies found themselves amongst the worst performers following June 23rd, but the keenest

targets of director buying.

Added to directors dealing we have seen form corporate confidence in the UK. There has been a bid for ARM holdings by

Japan’s Softbank and a counter-bid for Premier Farnell. In addition to this we have had multiple commitments to invest in the

UK, such announcements coming from Boeing, Siemens, Ineos, Well Fargo, Amazon, Sainsbury, McDonalds, Glaxo and a host

of other businesses, domestic and foreign, across a swathe of sectors. This brings me finally to the paradox of amalgamation,

part of the Fallacy of Composition.

If we focus on certain groups and then assume they are representative we will come to quite different conclusions. For my

part the upbeat confidence shown by those running businesses with their own financial capital has more weight than the

downbeat view of purchasing managers who work for them and spend money which is not their own.


2. A balanced assessment of payments to and from the UK

It is accepted by many, almost as an axiom, that the UK is in a critical balance of payments position, one which has been

growing ever more desperate and approaching a dramatic economic denouement. Those reasoning in this way will no doubt

be voicing hysterical concerns that far from helping draw the UK back from some balance of payments deficit induced

precipice, the post-Brexit decline in sterling will push us into an external account abyss.

It is easy to believe the UK will fall victim to the infamous J-curve. The idea here is a weakened pound will send the cost of

our imports sharply higher against which any boost to the value of exports will prove inadequate to compensate. The result is

the deficit in the UK’s current account will widen. To compound this, there is the fear that post the shock EU referendum

result inward capital flows will decline sharply, simultaneous to which there will be a stampede to evacuate what is already in

the UK. The outcome of this combination would be the capital account hurtling ever more into the red.

Chart 3: UK trade balance: goods versus services Chart 4: Current account balance vs. £ trade weighted

Source: ONS, Toscafund

I am repeatedly told that against the backdrop of the UK’s current and capital accounts in deepening deficits the pound

cannot avoid continuing to slide, thereby creating a vicious cycle, and triggering higher interest rates in response. The

argument is that our balance of payment deficit will only narrow as our economy shrinks. Let me admit that in writing what

came before I did feel a momentary shudder, I hasten however to emphasise it was only momentary. Because if we begin

from the very beginning we realise the story is based entirely on falsehoods. Let me now provide what I am convinced is the

true story.

Chart 5: Net Foreign Direct & Portfolio capital into UK Chart 6: UK Capital account balance


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Let me begin with my own axiom. The UK does indeed have a balance of payments problem, and THE problem is in its

measurement. Sure we have a generally good idea of visible trade flows. That said, even this is far from perfect, which I will

explain later. Moreover we have a worsening idea of invisible flows and a woefully bad idea of capital flows.

Just think for a moment of the growing number of tourists who add to our economy, and will add all the more so as a result

of a more competitive pound and burgeoning middle classes around the world who all have travel lust. When they come to

the UK and spend on their credit cards they provide a very tangible but largely invisible addition to our foreign earnings. True

they might buy what we have previously imported and which has been a debit to our visible account. This accepted, they pay

us all the same. Their value-added is all the more when we consider what they spend in their hotel, their meals and general

recreation. Why is it not accurately measured? It’s because we haven’t the systems in place to do so, nor too the willingness

to browse bank transfers in micro-detail. There is, of course, the flip-side that we travel overseas in our turn and so ‘bleed’

pounds which are not fully recorded. My response is that growth in the under-recording of debits to our invisible tourist

trade is far smaller than growth on the credit side. So much for the poor recording of spending by tourists to the UK you

might say; surely this can’t account for much of an exaggeration in our balance of payments “problem”? Well, it is neither

insignificant and but one of a great many other areas of the UK economy that is vulnerable to recording errors, namely

understating “credits” to our balance of payments.

Consider the students from abroad who are coming to the UK in ever increasing numbers. From their fees to their living

expenses we have credits to our capital account; credits which I am convinced are grossly under-recorded. My reasoning is

the same as for tourists; we simply have not got the techniques to measure bank transfers in micro-detail. Indeed, to remedy

this would require an invasion of banking privacy which would not be readily tolerated. You may well reply that banks must

surely aggregate their international capital transfer data for the benefit of the authorities with the statute of statistical

economic measurement. My reply is yes they do, but they are missing more and more as traditional bank transfers make way

for more esoteric methods of payments and more participants in the world’s financial markets whose activities are not

captured.

Chart 7: Tourism to the UK: visits & spend, with forecasts

Chart 8: Students arriving from outside EU, with forecasts

Source: ONS, HESA, Toscafund

On my quest to unearth where we are under-recording the annual change in our balance of payments position I turn next to

those many millions of economic migrants from the Single Labour Market, who have arrived in the UK over the course of the

last dozen years. Now, few can doubt the majority come with not only useful human capital but financial capital as well. Let

us reflect for a moment on the money they transfer. Not only would I maintain a growing part of this goes unrecorded on the

capital account, but some even goes to skew the current account towards showing a ‘worse’ position. Let me elaborate.

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Chart 9: Net immigration, annual and cumulative Chart 10: EU nationals registering NI contributions

Source: ONS, DWP, Toscafund

With only a handful of modest exemptions (Cyprus, Ireland and Malta) the majority of EU nations demand drivers remain on

the “wrong side” of the road to that required in the UK. We have not seen many more millions of left-hand drive cars appear

on our roads, and yet a not insignificant proportion of new arrivals will now have their own motor transport. Consequently,

they must have added to our new and used vehicle sales. We have a real situation then, of some imported cars which record

a deficit on our visible trade account, but one paid for by a balancing credit on our capital account. The same argument

applies to their initial purchases of other imported household and personal durables. And the same reasoning is relevant for

some students who come to the UK to advance their knowledge.

Let me continue on the theme of cars and household and personal durables and how their purchase can fail to capture a

boost to our external account. Consider a buyer from overseas of a British built car, who is actually resident in Britain; it could

be he has a second home in the UK or a student who is a scion of a rather wealthy family. In this event the vehicle would not

appear as an export in our visible trade account. It would however most likely have been purchased with foreign capital

making its way through the credit channel of the capital account.

A moment ago I mentioned an overseas buyer of a British home. Here too it has been all too easy to miss a payment using

foreign capital. Is this, and all other instances, of the understatement of our external earnings an attempt to contrive a more

favourable story than the one presented by prima facie balance of payment figures? I for one see nothing unreal about any

of the examples I have cited.

I could go on and unearth other areas we misreport – read exaggerate how alarming it is – our annual balance of payments

position. I have not even touched upon the growing understatement of foreign direct and foreign portfolio investment to the

UK, explained by the same reasoning I have outlined earlier. And in each instance of where I have illustrated how we

understate inward capital flows I would say the degree this happens correlates positively with our GDP, thus making a

mockery of charts 5 and 7 through to 10. The bigger we get as an economy, the more we over concern ourselves with a

balance of payments crisis.

Let me highlight one piece of evidence which supports my reasoning that our external account balance is far healthier than is

being suggested. Economic theory tells us that sterling’s trade weighted value would have moved downwards in tandem with

any genuine consistently large deficit in our balance of payments (see chart 4). The reason sterling’s trade weighted value has

not recorded an unrelenting decline is rather straightforward to explain, it is not our external account economics which is

wrong, but its measurement. The pound hasn’t held remarkably steady for much of the period since 2009 because it has

been levitating in defiance of external account deficit gravity, but rather because our external account has been more

balanced than much of what has been written and spoken about it. These stories are plain wrong.

In closing, let me reflect on the recent marked slide in sterling, and the concerns I referred to earlier in this text that it will

bring on a J-curve deterioration in our seemingly already beleaguered current account. Well, I have already made the case

our balance of payments overall are far from beleaguered because they are far properly recorded. To dismiss concerns we

face a J-curse, I will take the liberty of reproducing my thoughts from a recent research piece. Before I do so let me end this

particular section by making it clear that a weakened pound has cheapened UK assets and made them all the more, not less

enticing to overseas capital.

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Text from Toscafund’s July discussion paper “Thoughts on the Hero Syndrome, J-Curse, U-bends & U-turns”

Now, although in personal terms I remember the 1970’s as if they were only yesterday, in UK economic terms that decade is

pre-history. Back then we had a sizeable heavy industrial base, hungry, indeed addicted, to voluminous imports of natural

resources, which were essential to feed kilns, furnaces, foundries and factories. From shipyards to steel mills across to glass

firing plants to tyre making factories, etc., we imported the raw materials that were essential to manufacture the finished

products which earned us foreign income. Against this traditional industrial backdrop a weakening pound did indeed bring

upon us the J-curse, indeed it could not fail to do so. Yes, in short in the past the pound going down sharply was not to be

welcomed but feared. What must however be made clear is that our economy is much different now, for which read much

advanced, and much improved.

If one looks at the UK economy today one sees that it has been transformed for the better with each passing decade since

the awful 1970’s. Our industry has shifted from being cumbrously heavy, low value-added and commoditised, to being lean,

high-end and almost peerless around the world. This applies to the cars we make to the aero-engines we assemble, and it

applies to the technology and pharmaceutical products which we develop, design and earn foreign income from licensing

around the world. Our traded services too have expanded like no other developed nation. These generate foreign income not

because we sit on uncomfortable stools alongside noisy lathes grinding out metal tools but sitting relaxed at our desks

creating for the world market the expert services it demands of us; legal, insurance, advertising, media and other creative,

financial and educational services.

Those pointing to James Dyson having shifted his production to Malaysia need it pointed out to them, in turn, that it is the UK

where he employs his large, well trained and well rewarded research and development team, and where the profit of his

endeavours return to. Who knows he may indeed choose to re-shore some of his manufacturing. My point is that the J-curse

has been exorcised by our becoming a prototype of where a modern developed economy needs to be. We are a positive role

model unlike so many EU nations which still dwell on their former glories.

As well as all the other features which favourably separate the UK economy from the rest of Europe, there is the way it has

been at the forefront of disruption. I am not alluding here to disrupting the EU by voting to leave it, but to the way it has

been Europe’s crucible for disruptive technologies. Crucially, these are set to provide a welcome degree of import-cost-

inflation-shock-absorption for the UK economy. And, here again, we have a development which is unprecedented in the UK’s

history helping to make J-curve arguments largely anachronistic.

The reality then is that we must not fear that a weak pound will create a J-curve in our balance of payments. There will be NO

such hockey-stick to beat us with. Instead the multiple economic benefits of recent sterling weakness will come through

rapidly. They will come through quickly in tourist numbers and their spending. They will come through rapidly in increased

export orders and substitution of imports for home-produced goods and services. And they will come through rapidly from

the new academic year as students from overseas enjoy their wealth benefits from a more affordable pound, their benefits

proving our benefit. This is not me presenting some rose-coloured vision but a clear economic argument un-obstructed by

the bitterness and hubris some insist on carrying in the wake of the vote to leave. As I have said it the ‘Leave’ side which

actually needs the obstruction of a U-bend, so as to flush away the economic outpourings (I wanted to write excrement but

wasn’t allowed to) they still insist on producing.


Rent a quote

According to the Resolution Foundation, Britons are no more likely to be owner-occupiers today than they were

back in 1986, with this particularly “true” across northern England notably Manchester. The newsworthiness of this

story can be explained largely by the subtext which we have been fed for many years. This is that Britons have some

alienable right to be owner-occupiers rather than mere tenants, certainly not tenants across the ‘exploitative’

private rental sector. Now, I will not dwell on the detail that there is no justification in any school of economics of

what constitutes the ‘optimal’ proportion of owner-occupancy. What I will use this vignette to say is that we have

seen in the recent Resolution Foundation report another instance of the ‘Fallacy of Division’. Over the 30 years the

report claims the UK has seen a decline in home ownership, the UK has in fact recorded a sharp rise in the number

of ‘households’ made up of full-time students as well as foreign born households. Specifically, since 1996 the

number of full-time students across the UK has risen from 1.72 million to 2.27 million, whilst there has been a 173%

increase in foreign born workers from 1.9 million to 5.2 million. Since none can reasonably doubt that students and

recent economic immigrants will have markedly lower rates of owner-occupancy, the rise alone in their relative

representation will have dragged the overall rate lower.

I would maintain that were the Resolution Foundation chosen to control only for British-born working households it

would have recorded nothing like the decline in owner-occupancy it claims to have found. Indeed, were it to have

allowed for households occupying privately rented premises whilst being landlords in their own right, the decline

would have been even less. It is worth noting too that there are significant difference in housing tenure by age (see

charts 11, 12 and Appendix 1), younger householders mostly beginning as tenants before “progressing” to home

ownership. But to repeat, there is absolutely nothing socially or economically unwelcome about households residing

in private rental properties. Indeed, for the purposes of social mobility and regional flexibility helping us adapt to

changing employment needs, a large well-regulated – controlling quality not rents – private rental market is what

we should strive for.

Chart 11: Housing tenure in England, all ages Chart 12: Housing tenure of persons aged 16-34

Source: ONS (English Housing Survey), Toscafund

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3. Labouring another data point

Those deeply concerned by the UK’s balance of payments position invariably point to a number of other ominous challenges

facing our economy. Indeed, these provide a degree of variety to their nightmares. One of these alternative night panics is

the UK’s seeming lack of productivity growth, another it’s stagnant wage inflation. Often, in fact these come together; the

failure to uplift output per person followed by the inability to reward through more pay.

As to why advances in our labour productivity seem practically nonexistent explanations are sought to explain why. Those

most often cited include labour hoarding: zombie labour kept in moribund businesses, kept ‘alive’ by zero-interest rates.

Another is our economy becoming ever more

geared to low value added sectors; a regression

down the development curve, as it were.

Now, just as with concerns levelled at our

balance of payments, I accept the UK has a

labour productivity problem. And the problem

is the same; we are not measuring either

terribly accurately. My contention is that

because we are failing to measure a great deal

of output produced by the UK’s modern virtual

value-added service based workforce, we are

understating its productivity. And this error has

a downward bias, one which is drifting higher

with time. To use its statistical nomenclature, it

is not some white noise epsilon error but one

with a negative mean and heteroskedastic. So

we are understating both the level of our

labour productivity and its rate of growth.

My argument above has one immediate

obstacle to overcome, and a fairly large one at

that, if significant parts of the UK workforce are

becoming more productive this should provide

them with pay bargaining power. So why the

absence of wage inflation? I believe the answer

is straightforward enough. A great deal of

increased remuneration has gone unmeasured.

If it seems that this is my stock answer it is

because it is the fundamental problem of the

UK economy. The metrics applied to it were

devised for a mercantilist economy producing

standardised physical goods, not the prototype

specialist service based economy we can now

proudly boast it is. And the “brown cash-filled

wage packet” which characterised the UK

labour force in the past whose pay contents

were often arranged by unionised collective

bargaining, is now one whose earnings are

often self-determined and can be paid in a

variety of esoteric ways.

UnbeLEAVEble but true

I have never before and will probably never again be asked a question,

as often as the one concerning the UK’s eventual migration strategy

towards Europe’s Single Labour Market (which incidentally includes

non-EU Norway). My answers tend to centre on a desire that we stop

the discriminatory policy we have at present. I wish to see us treat

equally all those who wish to come to the UK with ambitions to work or

study. And to do this we need a visa-system which does not privilege

EU over non-EU nationals. The reality is that, at some point in the near

future, the UK will restrict free access to EU nationals, at the same time

becoming more accommodating to those from beyond Europe. Some

will see this as unfavourable to the UK economy, I cannot agree. In fact,

not only do I see this revised – reset – migration policy as beneficial to

our economy, I also view it as a benefit to some of the most distressed

parts of the EU.

My reasoning is that from Greece to Spain, and now increasingly even

from France, distressed euro-zone nations are exporting the one

resource which they must keep to stabilise economic indeed social

matters; their prime-age adults possessing transportable skills or

simply a willingness to work. This evacuation is being facilitated by the

Single Labour Market within which the UK is the most favoured

destination.

Now whilst their arrival has delivered a boost to property demand and

other economic aspects across the UK, it has to be recognised that as

they depart they drain ever more strength from the economies from

whence they come. True, many remit money ‘home’. Notwithstanding

this there can be no denying their departure deprives their ‘home’

economy of consumers, producers and reproducers. And as EU nation

after EU nation is hollowed-out of its prime-age population, its Single

Market is becoming ever more polarised, which is starkly at odds with

the stated ambition of harmonisation. Ironically then, any “Emergency

Break” towards the Single Labour Market for the UK would remove the

easy option of a move to it from depressed corners and help stabilise

populations and by association economies. Even more ironically until

we get some clarity on the UK’s new position regarding the Single

Labour Market there is almost certain to be an increase in the number

arriving in the UK from across it. This will simultaneously further fill-out

the UK economy as it hollows-out nations where our new arrivals

originate.


As much as a failure to capture earnings growth may explain its general absence, there is of course a more fundamental

reason; an expansion in labour supply for the most part caused by the arrival of considerable numbers of economic migrants

from elsewhere across the European Union’s Single Labour Market. These new entrants have shifted the UK’s labour supply

curve ‘to the right’. Now this would of itself have led to a decline in average wages. That it hasn’t would imply that the

demand curve too has moved rightward. In fact what we seemed to have had in the UK since 2010 has been continuous

rightward movements in both demand and supply. The overall result has been our economy has seen employment rise but

lowly wage growth. And whether we wish to acknowledge it, the failure of many Britons to see wage growth has bred their

resentment towards new arrivals. In essence, as new arrivals have pushed the supply curve to the right, so they have pushed

many Britons to the political right. And one could argue the vote on June 23rd was the momentous result of this. There is, of

course, the question where do we move to now?

Let me answer the question I just raised in two parts. I will consider what impact the decline in sterling is likely to have had

on the UK labour market. In addition I will try to anticipate what new or revised form the EU’s Single Labour Market will have

on labour supply within the UK. First to the pound’s decline.

Sterling fell in the weeks ahead of the referendum

and did so steeply in the wake of its result. The

pound weakened still further when on June 30th,

one week after the referendum, the Governor of the

Bank of England stressed the base rate would be

reduced to mitigate for the economic shocks he

feared would follow the result. As it was, seven of

his fellow Monetary Policy Committee members saw

no pressing need to press the rate cut button. On

seeing their reluctance to be drawn into action

ahead of data, Mr Carney himself had to volte face,

using his privilege of casting the final vote to go with

the majority (I will not dwell on what this says about

his stewardship). Having ‘priced-in’ a cut from the

Governor’s press conference of June 30th the pound

duly rallied on this decision.

Even with its recent rebound the pound is down

12% against the euro through 2016. Now there are a

great many EU nationals working in the UK who, for

whatever reason or purpose, choose to regularly

remit money ‘home’. These will have to rise by 12%

how much of their sterling earnings they commit to

this transfer if they are to maintain the remitted

value. Against this backdrop it would not be

unreasonable to argue this has opened an avenue

for upward wage pressure. It is no less unreasonable to claim that the pound’s decline has given a great many sectors the

capacity to use some of this to improve trade competitiveness, partly to raise prices and crucially an element to be more

generous with wages. In short if EU nationals or indeed any workers across the UK try to push up their wages there are now a

range of sectors within which managements might be accommodating because of the competitive boost they have enjoyed

from the pound’s decline. This is not to suggest I anticipate further weakness in the pound, far from it. Let me elaborate.

There is not a doubt in my mind that within a handful of years the pound will have more than reclaimed the losses it has seen

of late. This of course begs the question of how I expect wage inflation to be sustained, to which end I turn last then to

anticipating what new or revised form the EU’s Single Labour Market will have on labour supply within the UK.

Brexit; yet more Deva-like behaviour

Brexit has in effect added the UK to the long and growing list of

nations devaluing against the dollar and euro (Abenomics was

essentially a devaluation strategy). Such competitive devaluations

(often decried as beggar thy neighbour moves) are worsening

deflationary conditions in dollarised and euroised economies. In

doing so these are forcing yields ever lower – and indeed negative

– and in the case of the euro-zone neutralising the otherwise

inflationary effects of QE. Since the bank-assurance industry

needs yield this is extremely alarming. The question now is which

of the two major currencies – euro and dollar – will be the first to

move sharply lower against the other? I am convinced it will,

rather amazingly, be the dollar. Why? Because the two rivals for

the Presidency are essentially, although for quite different

reasons, inflators. Moreover, I expect the Chinese from November

to earn ever more of the world’s savings taking far more market

share from the dollar than anywhere else. Why November?

Because that’s when the IMF introduces the RMB to its SDR

basket, and also when the US goes to the polls. What this all

means is that it will be EZ bank-assurers who have much more to

lose since a move higher in the euro against the dollar is the last

thing that single currency needs. The simplest solution for the

euro-zone is a devaluation of its own. The problem is that others

are getting their devaluations in first, not least the UK.


Chart 13: Cost of living vs wage inflation Chart 14: UK workforce


Let me be clear that I cannot claim to have a perfect view of what system for receiving economic migrants to the UK will be

employed (sic). This said, there are sufficient working (sic, once more) models around the world which offer perfectly suitable

templates. The Australian and Canadian visa models come immediately to mind. In fact I have long found it remarkable that

Australians and Canadians wishing to bring their skills to the UK have had to overcome work visa hurdles which unskilled

arrivals from across the EU have not faced. Closer to home we could imitate – on a grander scale of course – the models

employed by the non-EU Bailiwicks of Jersey and Guernsey.

By adjusting our approach to immigration to one which does not discriminate between EU and non-EU nationals we can

focus on discriminating instead on what labour the UK is most in need of; whether it be professionals or artisans, or indeed

whatever skilled manual or non-manual skills are in demand across the economy. This process will, by its very nature prove

sluggish and reactionary. And it will react where labour markets are tightest and this will manifest in wage pressures. These

will provide a clear signal where we need to be most accommodating in accommodating new arrivals.

Chart 15: Unemployment rates, regional comparison Chart 16: Unemployment rates compared through

“uncertainty”

Source: ONS, Toscafund Note: Red lines denote the announcement and vote of the Scottish referendum, the grey lines denote the dissolution of Parliament and the GE

In short, our new migration model will involve wage inflation as a crucial element. Some will no doubt see any such system as

too close to one found in a command economy. I would argue it works perfectly well across some of the best performing

economies around the world, and can work perfectly well in the UK.

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4. A welcome Deliveroo-lution

Whilst I wish to focus on a specific innovative entrant to the UK economy, I would like to stress that what I write extends

more widely to other ‘apps’ that have swept into and changed our lives over recent years. It also applies to the next

generation of applications which are certain to transform how we live in the future. Indeed many of the new innovations are

likely to supersede what at the moment are considered state-of- the art. More specifically let me then turn my focus to and

explain my fascination with, Deliveroo, which I would argue has provided for, not inconsiderable, positive economic

externalities and multipliers across the UK.

Based in London’s Soho, Deliveroo began as an online delivery company. Whilst it may not have appeared terribly original in

using self-employed bicycle and motorcycle couriers, it is unlike its close rivals Just East, Hungry House et al in not simply

taking foods orders but also facilitating its delivery. This meant that food outlets and restaurants which had hitherto not

allowed for a “take-away” service could do so. Now I cannot emphasis just how transformational this will have been across

the sector.

Rarely is it the case that a particular restaurant is filling its capacity to prepare meals. What I mean here is that the ability of

the kitchen to meet demand is almost always greater than the orders coming in. After all, most high-street restaurants have

seating capacity constrained below the ability of the kitchen to cater for ‘covers’. Matters are made more frustrating because

we tend to have similar routines for “going-out to dine” so creating surges in demand and frustrating restaurateurs’. The

result is that restaurant owners find their business being frustratingly under-utilised for large parts of the day, only to then

have to often turn away customers who could easily be served by their kitchens but not seated. True, we see “early-bird”

discounts to encourage diners to come out say before traditional cluster periods, so as to more utilise kitchens and other

stubborn fixed costs. True too that we enjoy watching celebrity chefs trying to save restaurants whose chefs and waiting staff

cannot manage to satisfy a scattering of diners well below seating capacity. All this accepted few can deny that Deliveroo has

helped restaurateurs more fully meet the capacity of their kitchens. And as they have utilised more of their capacity so the

forces of operational gearing have lifted their net margins and send profitability higher. The Deliveroo-lution has however

not ended with transforming how we received restaurant quality food.

From sheds selling building materials to many other commercial activities owners have begun to use Deliveroo couriers to

more cost effectively meet customer orders. Of course, there are limits to what can be carried and how far it can be

transported for many SME’s whose customers are relatively local, the speed and cost of Deliveroo is providing an ever more

compelling alternative to traditional forms of delivery. Crucially, greater efficiency and improved cost effectiveness cannot

have failed to deliver a boost to margins and overall profits. And if profitability increases one would expect employment to

follow. After all if businesses can see a greater utilisation of new capacity they will be more inclined to invest in it.

Collecting together all the thought expressed above we not only have Deliveroo providing employment for couriers we also

have it producing valued profitability multipliers to the businesses it serves whilst at the same time opening up to our own

doorsteps the arrival of everything from restaurant quality food to things we would not be able to receive so speedily or cost

effectively.

Deliveroo have, of course, not been the only intermediaries to come along and lift capacity utilisation for others across the

UK, or doing so whilst helping us to find bargains and quite rightly helping themselves to some well earned profits and no less

lucrative public listings. There was the trail blazer LastMinute.com and all those websites which have followed in its wake in

flattering imitation. They have both guided us to affordable availability of everything from hotel rooms, restaurant tables and

theatre seats, whilst at the same time filling out these premises with customers and reducing their expensive voids. This has

produced ‘good’ deflation, welcomed by us as marginal customers and by businesses, since revenue comes often with little

or no marginal cost. It is also good because it encourages hiring and investment. In fact, because it is not being properly

measured this “good deflation” is not captured in the consumer price index which by implication is exaggerating inflation and

so understating real interest rates. In a rapidly changing world we really do need more dynamic change in how we record it.

I cannot discuss Deliveroo without comparing and contrasting it with the rapidly growing but controversy-ridden Uber. Whilst

Deliveroo complements a large swathe of businesses to lift the utilisation of their services, Uber competes to take-out


capacity (its estimated 25,000 London-based drivers fiercely rivalling traditional London taxi drivers and the likes of Addison

Lee). One is in a race to life the take-up of the goods and services provided by other businesses, the other on an

uncompromising march to take-out incumbents. For us as customers one is reviving established businesses models and

helping their incumbent participants, whilst the other is undermining those active in the model it is trying to category-kill. In

London, Uber’s glorified mini-cabs are taking on and taking out traditional “Black cabs” and Addison Lee. At some point we

will no doubt look back and realise that some new arrivals have brought with them universal benefits, whilst others have

brought about the end of what we will come to regret the loss of.

Now quite remarkably the UK did once have a sizeable “courier force” many under the collective banner of Addison Lee. In

fact back in the time of pre-email couriers would be an extremely common sight roaming from office to office across London.

They would collect and deliver documents at speed, the quickest alternative transmission for which were fax machines

whose flimsy paper had a habit of fading fast. With improvements to the fax machine and then more importantly the

advance of email, the physical traffic of documents made way for their electronic transmission. For Addison Lee this triggered

a major move into the market of moving people, institutionalising the “min-cab” market and disrupting the “black cab”

industry. Since then, Addison Lee too has been disrupted most significantly by Uber. Whilst one can only guess at what

revolutions lie ahead one thing is clear; no incumbent can be complacent. Indeed, as a STOP PRESS I could point to the

increasing price comparison visibility provided for by the likes of Cab Guru and Karhoo! These are as welcome to us as

passengers as they are an unwelcomed to the likes of Uber, since they make the predator into the prey.


5. A positive power signal

We were recently ‘shocked’ by the eleventh hour announcement that the otherwise imminent decision on developing a third

nuclear power station at Hinckley Point would be delayed. This has been interpreted in a number of unflattering ways to the

United Kingdom’s economic future. Some have spun the news of a postponement to complain that ‘post Brexit’ Britain has

become ‘unwelcoming of outside investment’ and more specifically less indisposed to capital from China, and so threatening

our ‘Golden Age’ of Anglo-Sino economic engagement. One individual to express such a criticism has been Sir Vince Cable.

Significantly, he had been Business Secretary during the 2010-15 coalition Government which entered into a Strategic

Investment Agreement with China to fund three new UK nuclear power plants (one of which was to be Hinckley Point C,

another Sizewell C). Cable went on to be more specific suggesting the new Prime Minister, and formally Home Secretary, was

uncomfortable with heavy levels of Chinese investment into Britain.

Now, it is nonsense to see the delay as anything other than a welcome sign that good sense had returned to Government

thinking. As it stood the deal with EDF (for the most part French state owned), the owner since 2009 of British Energy, and

the technical and practical partner to China’s capital, was onerous to the UK Exchequer and to UK energy users. The 2012

pre-commitment to a fixed ‘strike’ price of £95kw/h - with inflation indexation - over such a protracted period (35 years) for

the nuclear energy produced by EDF was a mockery of commercial and financial good sense - market prices being little more

than half that since 2015. It is instructive that Jim Ratcliffe the chairman and chief executive of the chemical group Ineos

recently agreed a deal for nuclear power in France at £40 per MWh, and was quoted in reference to Hinckley Point C “forget

it. Nobody in manufacturing is going to go near £95 per Mwh”. This is all the more important since Mr Ratcliffe is “reshoring”

himself and his firm to the UK six years after having left for Switzerland, also announcing his company wishes to invest

heavily in on-shore shale gas exploration as well as hoping to restart UK production of the Land Rover Defender. In fact since

the referendum the UK has seen businesses across multiple sectors commit themselves to investing here; Boeing, Siemens,

Amazon, Wells Fargo, McDonalds et al. And all will no doubt agree with Jim Ratcliffe’s assessment that the EDF Hinckley C

deal requires a reboot.

We should not see the delay in Sizewell C as a sign the UK was now closed to cooperation in infrastructure deals with

overseas investors and operators, and most definitely not China. Instead, it should be viewed as the new UK Government

being awake and wide-eyed to what was the best deal for its taxpayers and energy users. After all, Gilt yields have

compressed markedly enough to allow us to fund such deals with ever more affordable international capital. Energy prices

too have fallen from levels when the Hinckley deal was first drafted. Rather than see the Hinkley Point C delay as negative we

should view it as a powerfully positive signal.

The reality is that we should not be rushing into hasty decisions in the wake of the referendum result. This means no rush on

deciding the metrics undermining new nuclear capacity, nor on the base rate, neither to the triggering of Article 50, or a

premature announcement on how our immigration policy will work once we have triggered Article 50 and then formally left

the Single Labour Market. After all, the best way of exercising power is to hold much of it in reserve. Sadly, the Bank of

England’s Monetary Policy Committee do not believe in such reasoned patience, stimulating an economy in no real need of

it.


6. A welcome Devolution Revolution

Ranged alongside the myriad of other embedded economic problems, I am told by its detractors that the UK suffers, is its

‘north-south divide’. Indeed, some see this as its most insurmountable challenge, fostering not simply socio-economic

fractures, but no less alarming political ones.

It is perfectly true that a latitudinal wealth division exists within the UK. The reality however is that wealth disparities can be

found across say Lancashire, Essex and Devon, as well as within London, Leeds and Leicester. These are not simply latitudinal,

longitudinal or diagonal but in fact more resembling of a wealth patchwork, extremes often separated by little more than a

single change in post code.

Now, wealth varies place by place for reasons which we will never overcome. It also varies because of factors which we can

tackle through targeted policies and strategies. And I would maintain that outside of the EU we can narrow the element of

spatial wealth dispersion which can be addressed. I make this claim because the UK will soon be free of the EU’s insistence

that sales based taxes are harmonised within its member sovereign nations. Crucially the timing of the UK’s exit from the

EU’s formal strictures will coincide with the development of ever more power being vested into regional Parliaments and

Unitary Assemblies across the UK; from Holyrood in Edinburgh, the Senedd in Cardiff, and City Hall in London to newly

established Assemblies in Manchester, Birmingham, Leeds, Newcastle, Bristol et al.

I make the case for where devolution across it is taking the UK economy more fully in a soon to be released Discussion Paper.

Ahead of it I will provide this synopsis.

There is no economic justification or rationale whatsoever to demand VAT be the same across the UK, certainly not on goods

and services whose consumption is essentially sedentary (bought and consumed at the point of sale). I talk here of theatre

and cinema tickets, restaurant meals and hotel charges, even a hot beverage or snack carried out. The reality is that a

nationwide 20% rate for VAT does not reflect the spatial pattern of wages, but rather helps it to persist. And since VAT is a

centralised tax it is transported from where it is levied and sent to London and collected into a general HMRC vat (sic).

Assume for a moment that VAT were in part to be set locally across the UK and assume further that this element were to

remain to be spent where it was raised. Few could argue against the claim such regional fiscal power would be used by some

regions rather opportunistically to attract businesses and households wherever there was the greatest need to do so. How

could one also deny that we would be inclined to consider moving where we were being enticed by lower living costs,

particularly those in occupations where their earnings who move with them largely unchanged. And few could doubt that

this would have a favourable impact on narrowing spatial wealth dispersion. That region would compete against region

should not be seen as disagreeable, but liberating. After all a UK economy liberated from a nationwide ‘one-size fits all’ strait-

jacket is a UK economy where regions can tailor their fiscal policies to meet their particular needs and challenges. Indeed, as

more tax revenues were allowed to remain where raised, so unitary assemblies would be able to issue municipal bonds

secured on future revenues. There would of course need to be macro-prudential oversight to watch out for ‘maverick’ fiscal

and/or monetary behaviour. As for whether regionally distinct sales taxes would help narrow spatial wealth dispersion, the

answer can be found in the evidence that the UK labour force has never before possessed such a degree of transportable

skills, and so never before had the potential to be so peripatetic. What is missing is a tax motivation for us to tap into this

flexibility to move where, high amongst other considerations, household budgets go furthest; as determined by the most

appealing local income, sales and property taxes.

Is this some fanciful future I present for the United Kingdom? Well, it works perfectly well elsewhere most notably across the

United States. And distinctly spatial income, inheritance, capital gains, corporation and sales taxation does not make the US

any less United. Neither too should the UK’s own cohesion be seen as in any way undermined as it begins to see and enjoy

the same tax mosaic.


As I wrote earlier, Toscafund will soon release a Discussion Paper dedicated to making the case that the UK is poised for a

Devolution Revolution. As a teaser I will reveal that it treats the process as it were pure SEEEX, a Scottish English Economic

Experiment. It goes on to critically argue against those with ambitions for a sovereign Scotland to return the EU to 28

members. The assertion made is that Scotland’s nationalists will find they have less manoeuvrability over economic policy

than were they to remain within an extensively devolved United Kingdom outside of a European Union whose ambitions

remain the straight-jacket harmonisation of policies across and within member nations.

Hammering a point home which is not such common sense

A common currency and over-arching singular interest rate are of themselves perfectly sensible IF they coexist with a

patchwork of spatial fiscal powers to manage policies to fit specific regional conditions. When however, the latter is absent a

national economy finds itself managed in a one-size fits all way. In such circumstances we find that economic policy becomes a

form of “Maslow’s Hammer”.

In his 1966 “The Psychology of Science” Abraham Maslow asserted that “if all you have is a hammer, everything looks like a

nail”. With practically no real regional devolution of economic powers the UK economy has regularly been hammered with

blunt instruments. After all few, if any, can doubt that were London to have its own monetary measures – its own currency

and associated interest rates – these would prove markedly different from say those of Scotland, Wales, the Northern

Powerhouse or indeed any other unitary region beyond the capital, were they also to have their own. The reality is that

wherever the pound finds itself at any time relative to other currencies, is a fudge or compromise, too high for certain UK

regions and too low for others; and so too with the base rate. Now this would not be a problem were substantive fiscal powers

to be devolved around the UK. I refer here to property, income and spending taxes to have a significant regional element, a

freedom to levy and spend differently according to regional needs and indeed according to manifestos which are promised by

elected Assembly members.

There of course will need to be macro-prudential oversight of devolved powers to ensure that the national fiscal interest is not

being compromised by free-rider or moral hazard regional tendencies. I refer here to the temptation for regional assemblies to

embark on free-spending or other fiscally imprudent polices believing there would be no down-side because they could always

rely upon being bailed-out by the ‘centre’. With the UK having voted to devolve itself from the EU it needs to use this

momentum to devolve powers within itself, not to loosen its Union but to in fact strengthen, for not having a common

economic policy is common sense.


7. Brexit II – Brexit would turn devolving doors (June 2016)

Some see the treatment of people with uniformity as fair. Others by stark contrast see any failure to distinguish between

ability and need as the root of unfairness. Very often those pursuing one of these lines of reasoning find themselves

inadvertently supporting the other. For instance some demand supra-normal taxation be levied on certain sectors and even

professions as being ‘only fair’. At the same time proponents of this will also demand nationwide pay bargaining, even

though changes to the cost of living are invariably different from place to place. From the other side some who demand

means testing of state benefits invariably decry the end of universal child allowance.

Just as there are those, like me, who see a nationwide tax system as indiscriminate of regional characteristics and a drag on

the macro-economy, there are others who view any spatial differentiation in tax rates as actually unfavourable for singular

stewardship of the British economy and bad for the sense of British nationhood.

Well, for those against devolving tax powers the rise of the SNP has now released that particular genie. Indeed, George

Osborne just might well be encouraging new unitary assemblies across England in an attempt to avoid Scotland – as well as

Wales, Northern Ireland and London – exploiting a ‘special status’ within the United Kingdom and stoking English

nationalism. Whatever the Chancellor’s motivation it is almost certain that looking at the UK in 2020 will see a tapestry of

varied fiscal policies and tax rates. And just as with the ‘council tax’ where we see that otherwise identical homes in one post

code are charged differently from others, so we will have to get used to differentiation more widely across our tax system.

Let me repeat that I welcome the devolution of fiscal powers. I am convinced they provide for clearer accountability in how

tax revenues are spent, and greater flexibility in how particular regions are managed. After all, it allows economic policies to

be tailored according to their particular strengths and needs.

Now, there are no practical reasons nor lack of contemporary precedent to deny the UK regionally varied income taxes.

Neither is there a lack of contemporary precedent for sales taxes to be varied within the UK – the United States and

Switzerland both exhibit them in a well functioning way. There is also plentiful motivation in economics why it should be

encouraged. All this said, differentiated intra-national sales taxes are precluded by some or other blunt EU Directive, part of

many of its centrally imposed statutes aimed to achieve the ill-conceived objective of ‘harmonisation’. This is just one of

many restrictions which Brexit would remove from the UK and so help speed us on our way to such self-managed English

economic engines as the ‘Northern Powerhouse’ and ‘Midlands Motor’. As for Scotland, I repeat that continuing in its long

established Union with England, Wales and Northern Ireland all outside the EU offers all the best hope of achieving the

maximum practical powers over their economic self-determination.


8. Brexit II – Welcoming of our tax disharmony when outside the EU (June 2016)

The United Kingdom is on the cusp of a devolution revolution. It should use this metamorphosis to transform its tax system

by shifting away from income tax to spending based taxes; far easier to capture in our close-to-cashless economy. The case

for sales based taxation is all the more compelling if rates are allowed to vary across the country and to differ according to

the nature of the goods and services being consumed. For instance we quite rightly exempt most off-sales food from VAT

because not to do so would expose this tax to the legitimate criticism of being regressive. Now as to why VAT is a flat rate

across the UK, and across almost all rateable items, is easy but extremely frustrating to answer; we have this blunt system

because of the EU’s desire for tax “harmony”. The reality is that as long as the United Kingdom remains in the European

Union it cannot restructure its sales tax system to improve the workings of the economy – rebalancing growth or the

efficiency and equitability of tax gathering.

Why is the VAT rate for a hotel stay, a restaurant meal or a theatre ticket the same in the swanky West End of London as it is

in beautiful Western Isles of Scotland? The answer is because the EU will not allow a distinction. And yet, few can deny the

logic of such differentiation. Why are luxury goods not charged at a higher VAT rate than more modest non-discretionary

items? The answer is because the EU will not allow a distinction. And yet, few can object to the idea that such a difference

would be merited on a host of equitable grounds. We are, after all, in an economy where conspicuous consumption is the

norm and where demand for many “luxury” items is remarkably price inelastic. Indeed one is minded of the designation

“Veblen good” – named after the Norwegian economist Thorstein Veblen – where demand for certain goods increases with

their price (an advertising campaign even using the strap line “reassuringly expensive” to promote a certain beer).

As well as being memorable for being the year the UK made a now wise EXIT from the ERM, 1992 was when the 10% “Special

Car Tax” was halved from the sales of new cars. Having such a tax has considerable fiscal merits. It is extremely progressive

and pro-cyclical, providing the Exchequer with revenues when car sales are strong which it can put aside for any manner of

non-motoring spending since there is no reason why revenues should be hypotheticated.

In short, to those who claim there is no reason the UK needs to depart from the EU to achieve its good economic ends, my

response is there are plenty. And one of the most significant is that the European Union’s obsession with the harmonisation

of sales tax means that the UK cannot make the transformational changes to its tax system where it moves towards tax on

spending and moves from a one-size fits all system which fails to differentiate geographically – as it should – or by products

(the EU’s VAT system is regulated by a series of directives, the most important of which is the “Sixth VAT directive” – Council

Directive 77/388/EEC of 17th May 1977 on the harmonisation of turnover taxes).

Such is the EU’s dogmatic stance towards harmonisation, that one of the demands it made of Greece in 2015, to release

much needed rescue capital for its beleaguered economy, was to raise VAT rates which existed on islands close to the Turkish

coast. That these hikes risked damaging the tourist industries on these islands, faced as they are with an ever more

competitive tourist market across in Turkey, seemed lost on the homogeneity obsessed European technocrats. The obsessive

focus on harmonising sales taxation is all the more frustrating when one considers the heterodox corporation taxes across

the EU, inviting corporate tax inversion; a transfer of wealth around the EU’s sovereign states where the net effect is

negative since it in effect is a transfer which benefits the corporate structures exploiting the opportunities presented to

invert taxes.


Chart 17: Rising self-employment, numbers & % Chart 18: New car sales value


In raising income tax, the UK can call upon around thirty million potential contributors; the number of those in work. Whilst

many of these are covered by the PAYE system an increasing number are self-assessed; the latter accounting for 15% at the

last count an all high in relative terms and still rising. Not only does self-assessment allow for less transparency in what is

‘rightfully’ owed, it also involves ‘lumpy’ and ‘late’ revenues. The simple truth is that when it comes to income based taxation

we will have to spend ever more taxpayer pounds to search out withheld taxes. If we, however, consider expenditure based

taxation, the ease of collection and universe of potential payers expands considerably; 35m overseas residents visiting the UK

each year (of which 8m are business visits), with the number of foreign students in the UK currently c500,000 having risen on

average by 4% each year since 2010. Now neither tourists nor foreign students earn in the UK and so yield little or no income

tax. However their spending is undeniably generous, and made in quite visible and taxable ways. To repeat I see no reason

why the Exchequer should not harvest tax receipts, from both Britons and ‘visitors’, using ever more targeted sales-based

taxes.

Chart 19: Non-UK Students in HEI’s Chart 20: Tourism to the UK

Source: HESA, ONS, Toscafund

When we talk about economically motivated immigration or foreign students we sometimes fail to grasp the widespread

benefits these arrivals generate. We should recognise that their demand for housing supports prices and rents and for

owners and landlords lifts their fortunes and so too the exchequer. Moreover a great many of those who arrive enter from

nations where they have left behind a left hand drive car and so become part of the market for new or used cars “righteous”

ones, again producing a welcome benefit to those whose fortunes rely on car making or selling and to the tax man. For those

of us with cars they also provide a welcome secondary market when we come to sell. I could go on and provide instance after

instance where arrivals to Britain to work or study produce unambiguously positive net-benefits. And to repeat Brexit would

not herald the end to the arrival of either workers or students from overseas, or their valued contributions to the Exchequer.

What Brexit would allow is the UK to shift to ever more targeted, spending based taxation.

There should be no objection to shifting from taxes directed where money is earned and whose evasion can become the

privilege of the privileged – and so essentially regressive – to taxes where income is spent and where levies can be targeted

6

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£, B

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capped at £3000

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to £7500-9000

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maximum £1000

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so they are progressive. And there should be no objection to the idea that ‘foreigners’ should contribute ever more to the UK

Exchequer if they are doing so in the enjoyment of facilities drawing upon British public services. In addition to raising

Exchequer revenues from tourists and students from overseas, a far more sales based tax system will allow revenues to be

extracted from tax recalcitrant’s such as those using ‘non-domicile’ or trust status to mitigate against their income tax

liabilities. As for the idea this would somehow discourage tourists or foreign students and their spending their ‘appetites’ are,

I believe, largely inelastic.

Quite frankly then, moving ever more to a sales-based tax system which varies both by the good or service being consumed

and where exactly this is happening can only be welcomed. This, however, can only be achieved if we EXIT the absurd

restrictions to achieve sales tax harmony demanded by the European Union.


9. Issue 14 – London’s homes under the hammer (June 2012)

The Evening Standard and Financial Times recently ran stories that warned of an impending correction in prices for homes

across London. This was actually quantified as a crash of up to 50% in the FT. The journalists cited the usual signs warning of a

looming price correction; elevated home-price to income ratios (chart 21), poor mortgage availability and so on.

Now let us make our position clear, far from expecting property across London to cheapen we forecast prices will move ever

higher. The likelihood is those selling London property in anticipation of a downward “correction” will be challenged in ever

buying back into the market without having to accept something far inferior to what was disposed.

There was a time, not that long ago, when London was largely “home” to indigenous Britons and indeed mainly native

Londoners. Then, the average income of a UK household relative to home prices and their access to funding, mattered in

determining whether the residential market had overheated. Now, a cursory look around London’s streets shows how it has

internationalised greatly in the last decade. This process is not only ongoing, it is accelerating.

One of the most noticeable features of London’s prime residential markets over recent months has been agents noting the

arrival of considerable interest from Greek buyers looking to evacuate their capital into selective post-codes across the

British capital. Crucially, we anticipate no let up in buying into London from overseas, Greeks competing with a great many

other nationalities for these prized assets. We are not suggesting the benefits to be confined to prime London property.

Rather we expect prices to rise across the spectrum of homes, the high end and low, new build and existing, all doing so as

demand outstrips supply.

There is a great deal of global capital looking for safety; protection from everything from the uncertainties of regime change,

to more punitive taxation. There is also a great deal of capital desirous of diversification. Not only is there financial capital

searching for a safe economic home there is a great deal of human capital across Europe looking for the same thing. In both

cases the UK and specifically London will be seen as an attractive destination.

The presence and growth of an international demand dimension for London property explains why traditional valuation and

affordability measures no longer offer the warnings of problems ahead they once did. Indeed, the reality is London property

will become ever more expensive and defy each fresh claim that a correction looms (see chart 22). The reason is simple,

global demand has and will continue to overwhelm local supply.

Normally when capital rushes somewhere with a sovereign currency, this moves higher, and as it does begins to slow the

process of asset price inflation. London does not however have its own currency, sharing one with the rest of the UK, much

of which does not have the same attraction to overseas capital. Now imagine for a moment how a London currency, lets call

it the LON, would have performed had it existed. There cannot be much doubt that with its strong economic fundamentals

the LON’s exchange rate would have risen impressively in most dimensions, against the euro and not least against the

currency of the rump UK. The experience of the Swiss Franc offers a clear example of how we feel the LON would have

moved. There is, however, no LON, and precisely because there isn’t explains why London property prices have been so

particularly strong.


Chart 21: London home prices relative to household income

Chart 22: London’s average home, priced in £

Let us consider the “value” of London property measured in the euro (against which a number of currencies even the Swiss

Franc are currently pegged) and the dollar (which is the de facto currency across much of the developing and resource

world).

Chart 23: London’s average home, priced in € Chart 24: London’s average home, priced in $

From the perspective of its pricing in both the euro and dollar we see London’s housing became a great deal more affordable

in 2007 and 2008, as prices fell in sterling terms and sterling fell against both units (charts 23 and 24). Indeed, prices

measured in these currencies have yet to return to their peaks. Make no mistake, however, it will not be long before they do.

In short, were London to have had a unique fiat currency there is no doubt this would never have fallen as badly against the

euro and dollar as the pound did in 2007/8. Moreover, more recently we would have expected it to have strengthened in

tandem with increasing demand for London’s real estate assets. By not making London’s property prices that much more

affordable in 2007/8 and in strengthening more recently a London currency, the LON, would have taken much of the sting

from London’s property price inflation cycle. Indeed, a separate London currency would have also meant distinct interest

rates, and these would no doubt have been rising for some time now, and would be some way from the “emergency rate” of

0.5%. Obviously no such London fiat currency or distinct interest rate exists.

Recently London property values, already moving higher, have been bolstered further in euro pricing terms by the pound

moving higher against that unit (charts 23 and 25). Of course the move has not been without oscillations, but the pound has

moved gently higher all the same. Looking ahead we are in no doubt the pound will appreciate against the euro, doing so as

the economic data emerging from the UK improves in tandem with deteriorating data from the euro-zone. The pound’s move

higher will be all the faster we feel once the ECB finally capitulates in its stubborn monetary stance and brings rates lower

(beginning the process next month). Of course from the perspective of euro buyers a strengthening in the pound will make

London property even more expensive. However, from the vantage point of an existing owner accounting in euros, the move


will prove a welcome boost at a time his property assets across the euro-zone were moving uncomfortably lower. Indeed,

even as London’s property affordability moves against them, we expect many euro buyers to retain their attraction to

London property; drawn by their desperation to find a safe-haven asset across a Europe short of such places. So much then

for euro buyers into London, let us turn to those accounting in US dollars.

We need to remember that a great many dollar denominated investors exist beyond the shores of the United States, saving

in that unit because they happen to largely earn in it; the dollar still the pre-eminent resource numeraire. This cannot

continue and as the “dollar commonwealth” begins to fragment, we are convinced the dollar will weaken in a great many

dimensions and not least relative to the pound.

Chart 25: London’s average home price: £, € & $ Chart 26: € / £ & $ / £ (actual & forecasts)

The experience of 2008 most recently illustrated that London’s property market is not immune from marked price

corrections. The fact falls were in thin volumes and have been reversed relatively quickly to us at least helps separate that

correction from earlier ones. Admittedly, London is a diverse property market and the quality of real estate varies markedly

across it; considerable price differences are evident in comparable properties not all that far apart. We anticipate such

variations to narrow, as rising prime property prices ripple powerfully outwards and arriving capital diffuses centrifugally.

Moreover, we expect ownership across prime parts of London, central and outlying, will shift ever more away from British

nationals and as it does, will make all the more a nonsense using anachronistic measures of affordability and credit access

that fail to allow for the flood of capital arriving from overseas.

There is of course the issue of London property prices diverging ever further from levels outside the capital. Indeed, there will

be those claiming that even if London pricing not only fails to correct lower but continues to rise, the rest of the UK will not

enjoy the same “good fortune”. Just as we expect pockets of property weakness within London so we recognise the UK’s

home price inflation head map will show chilling conditions beyond London. This is not however to say that Manchester or

Birmingham will not show up impressively. Ongoing investment in Britain’s transport infrastructure will act to upwardly re-

price areas in tandem with the improved accessibility. As London’s property owners see their notional property wealth

increase a growing number will chose to capitalise on this by relocating. In opting to “buy more for less” sellers of London

property will create inflation ripples outwards from it (charts 27 and 28). Moreover, if we are correct in anticipating a fresh

surge in arrivals from nations widely across the EU we should expect these not to settle exclusively in London but to diffuse

widely across the UK.


Chart 27: Average home prices, £: London vs. UK Chart 28: London and UK property prices

Let us return to the journalistic concerns over a bursting of the “London property bubble”. We took the liberty of asking the

journalists at the FT and Standard who most recently cautioned such an event looms, their tenure status. One reluctantly

admitted to renting, thus creating a vested interest in him predicting a “crash”. The other journalist refused to comment. To

smoke out his position we offered, if he did indeed own a property, to buy a two year futures contract on it at today ’s

valuation. After all, how could he say no, given his expectation of a downward move in value? He gets to live in his property

for two years whilst being perfectly hedged for the capital loss he is convinced looms. For our part we have to suffer a not

inconsiderable margin-call if we are wrong. We are still waiting for an answer.


10. Appendix 1 – Housing tenure by head of household, English Housing Survey (ONS)

Chart 29: Housing tenure in England, aged 16 to 24 Chart 30: Housing tenure in England, aged 25 to 34


Chart 31: Housing tenure in England, aged 35 to 44 Chart 32: Housing tenure in England, aged 45+


Chart 33: Housing tenure in England, aged 65+ Chart 34: Housing tenure in England, all ages


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11. Appendix 2 – MPC Composition: 2016 versus 2009

2016 Members Previously

Mark Carney (Governor)

Goldman Sachs (1990-2003); Senior Associate Deputy Minister of Finance, Canada (2004-2008); Governor Bank of Canada (2008-2013); MPC (July 2013 - present)

Ben Broadbent (Deputy Governor, Monetary Policy)

Goldman Sachs (2001-2011); MPC (June 2011 - present)

Dame Nemat Shafik (Deputy Governor, Markets & Banking)

Director General Country Programmes, Department for International Development (2004-2008); Permanent Secretary, Department for International Devolpment (2008-2011); IMF Deputy MD (2011-2014); MPC (August 2014 - present)

John Cunliffe (Deputy Governor, Financial Stability)

HM Treasury (1998-2011); British Permanent Representative to the EU (2011-2012); MPC (November 2013 - present)

Andrew Haldane (Exec. Director, Monetary Analysis & Chief Economist)

Bank of England (1989-); MPC (June 2014 -present)

Kristin Forbes (External member)

U.S Treasury Department (2001); MIT (2002); Council of Economic Advisors (2003-2005); MIT (2005-); MPC (July 2014 - present)

Ian McCafferty (External member)

Economist, Natwest Markets (1993-1997); Head of Macroeconomics, BP (1998-2001) Chief Economic Advisor Confederation of British Industry (2001-2012); MPC (September 2012 - present)

Gertjan Vlieghe (External member)

Bank of England (1998-2005); Deutsche Bank (2005-2007); Brevan Howard Asset Management (2007-2015); MPC (September 2015 -present)

Martin Weale (External member)

Director, National Institute of Economic and Social Research (1995-2010); MPC (August 2010 - present)

Source: Various, Toscafund


2009 Members Previously

Mervyn King (Governor)

Chief Economist, Bank of England (1991-1998);Deputy Governor (1998-2003); Governor Bank of England (2003-2013)

Paul Tucker (Deputy Governor from 1 March)

Bank of England (1980-2009); Deputy Governor Bank of England (2009-2012)

Charles Bean (Deputy Governor)

Head of Economics, LSE (1999-2000;) Bank of England Chief Economist (2000-2008); Deputy Governor, Bank of England (2008-2014)

Kate Barker Chief European Economist, Ford Motor Company (1985-1994); Chief Economic Adviser, CBI (1994-2001); MPC (2001-2010)

John Gieve (Deputy Governor until 28 Feb.)

Permanent Secretary, Home Office (2001-2005); MPC (2006-February 2009)

David Blanchflower (External member until May 2009)

Economics Lecturer, University of Surrey (1986-1989); Professor of Economics, Dartmouth University (1989-); MPC (2006- May 2009)

Tim Besley (External member until August 2009)

Professor of Economics, LSE (1997-2011); MPC (2006-August 2009)

Andrew Sentance (External member)

Head of Economic Policy & Director of Economic Affairs, CBI (1986-1993); Director of Economic Forecasting, London Business School (1994-1998); Chief Economist, British Airways (1998-2006); MPC (2006-2011)

Spencer Dale Bank of England (1989-2014); MPC (2008-2014)

Paul Fisher (From March 2009)

University of Warwick (1980-1990); Bank of England (1990-2009); MPC (2009-2014)

David Miles (From May 2009)

Professor of Financial Economics, Imperial College London (1996-2004); Chief UK Economist and MD, Morgan Stanley (2004-2009); MPC (2009-2015)

Adam Posen (External member from September 2009)

Economist FRBNY (1994-1997); Senior Fellow, Peterson Institute for International Economics (1997-present); MPC (2009-2012)

Source: Various, Toscafund


Toscafund Discussion Papers

The 2015 UK Election Outcome, January 2015

Growth of Britain’s Primary Cities, October 2013

Banking-on positive change in London’s property markets, 19 April 2013

Where in the world is this looming food price crisis? 1 March 2013

Britain’s Got Growth II: beating Germany on penalties, 17 January 2013

Seeing a quite different island in 20/20, 21 September 2012

Britain’s Got Growth, 31 May 2012

The building storm over Cyprus – Update, 18 May 2012

The Darkest of Greek Dramas: A Play for Survival, 16 May 2012

London 20/20 – Update, 30 March 2012

Update: Plotting North Korea’s path from regime-change to reunion, 20 December 2011

A Western Balkans crisis: A Europe wide problem, 2 November 2011

Plotting North Korea’s path from regime-change to reunion, 13 September 2011

Update: Scottish fiscal independence by 2015?, 13 June 2011

Cape Fear; South Africa’s chilling outlook, 18 March 2011

Scottish fiscal independence by 2015? 26 July 2010

Clouds darkening over Cyprus, 22 April 2010

Australia and Japan The best and worst of the G20, 26 March 2010

Who could possibly laugh through a Greek Tragedy? 8 February 2010

An employment outlook for London in 20/20, 13 January 2010

An A to Z journey into the economic future, 14 December 2009

An outlook for Canada & Mexico: Seismic Continental drift, 10 November 2009

Taking lessons in history, 5 August 2009

The REAL interest rate story, 20 July 2009

Balkan Four pose a greater risk than the Baltic Three, 30 June 2009

Dissin’ the Dollar, 25 June 2009

Release the Baltic Three, 3 June 2009

Toscafund Economic Papers

Issue 31 – EXITSTENTIAL thinking, March 2015

Issue 30 – 2015, Thank you for reading, December 2014

Issue 29 – My grateful nation, October 2014

Issue 28 – UK housing issues and solutions, July 2014

Issue 27 – Scotland’s Special Issue, June 2014

Issue 26 – Just lots of boring words, May 2014

Issue 25 – Vive la difference, April 2014

Issue 24 – Europe in crisis again, as Britain stands out, March 2014

Issue 23 – It’s all just talk really, January 2014

Issue 22 – TOSCANOMICS confronts…, November 2013

Issue 21 – Darn…, August 2013

Issue 20 – On matters United, June 2013

Issue 19 – Oh, Historic times, February 2013

Issue 18 – Why we should welcome Britain’s export earnings softening, December 2012

Issue 17 – Largely un-American, November 2012

Issue 16 – Back to the future, October 2012

Issue 15 – Europe: motoring to recession, August 2012


Toscafund Asset Management LLP

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The collective investment schemes managed by Toscafund (the “Funds”) are unregulated collective investment schemes, which pursuant to sections 238 and 240 of the Financial Services and Markets Act 2000 may only be promoted to persons who are sufficiently experienced and sophisticated to understand the risks involved and satisfy the criteria relating to investment professionals. Persons other than those who would be regarded as investment professionals must not act upon the information in this document or acquire units/shares in the schemes to which this document relates.

The information contained in this document is believed to be accurate at the time of publication but no warranty is given as to its accuracy and the information, opinions or estimates are subject to change without notice. Views expressed are those of Toscafund only. The information contained in this document was obtained from various sources, has not been independently verified by Toscafund or any other person and does not constitute a recommendation from Toscafund or any other person to the recipient. In furnishing this information Toscafund undertakes no obligation to provide the recipient with access to any additional information to update or correct the information.

The information contained in this document does not constitute a distribution, an offer to sell or the solicitation of an offer to buy any securities or products in any jurisdiction in which such an offer or invitation is not authorised and/or would be contrary to local law or regulation. Specifically, this statement applies to the United States of America (“USA”) (whether residents of the USA or partnerships or corporations organised under the laws of the USA, state or territory), South Africa and France. Any offering is made only pursuant to the relevant offering document and the relevant subscription application, all of which must be read in their entirety. No offer to purchase securities will be made or accepted prior to receipt by the offeree of these documents and the completion of all appropriate documentation.

Prospective investors should inform themselves and take appropriate advice as to any applicable legal requirements and any applicable taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant to the subscription, purchase, holding, exchange, redemption or disposal of any investments in the Funds. In certain jurisdictions the circulation and distribution of this document and the sale of interests in the Funds are restricted by law. The information provided herein is for general guidance only, and it is the responsibility of any person proposing to purchase interests in any of the Funds to inform himself, herself or itself of, and to observe, all applicable laws and regulations of any relevant jurisdiction. Prospective investors must determine that: (i) they have the authority to purchase interests; (ii) there are no legal restrictions on their purchase of interests; and (iii) the offer or sale of interests is lawful in the jurisdiction applicable to them.

Funds managed by Toscafund have agreed to modify investment terms for certain investors for bona fide commercial reasons, subject to applicable law and regulation. Lower performance fees were negotiated in the case of certain institutions and individuals who made substantial investments or who agreed to specified lock-up periods. An investor was also provided with the right to the same preferential treatment agreed with (if so agreed) subsequent similar or smaller investors. None of the investors with whom modifications have been agreed have any legal or economic links with the funds managed by Toscafund and/or with Toscafund. To the extent there have been any modifications, these have not resulted in an overall material disadvantage to other investors.

No liability is accepted by any person within Toscafund for any losses or damage arising from the use or reliance on the information contained in this document including, without limitation, any loss or profit, or any other damage; direct or consequential. No person has been authorised to give any information or to make any representation, warranty, statement or assurance not contained in the relevant offering document and, if given or made, such other information, representation, warranty, statement or assurance may not be relied upon. The content of this document may not be reproduced, redistributed, or copied in whole or in part for any purpose without Toscafund’s prior express consent. This document is not an advertisement and is not intended for public use or distribution. The source of all graphs and data is as stated, otherwise the source is Toscafund.

For Swiss prospective investors: The Fund has not been approved for distribution in or from Switzerland by the Swiss Financial Market Supervisory Authority. As a result, the Fund’s shares/units may only be offered or distributed to qualified investors within the meaning of Swiss law. The Representative of the Fund in Switzerland is Bastions Partners Office SA with registered office at Route de Chêne 61A, 1208 Geneva, Switzerland. The Paying Agent in Switzerland is Banque Heritage, with registered office at Route de Chêne 61, 1208 Geneva, Switzerland. The place of performance and jurisdiction for Shares/Units of the Fund distributed in or from Switzerland are at the registered office of the Representative.

Past performance is not an indicator of future performance and the value of investments and the income derived from those investments can go down as well as up. Future returns are not guaranteed and a total loss of principal may occur. Please note that performance information is not available for five years. © 2015, Toscafund, All rights reserved.

july 2016 toscafund economic update issue 37

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