This time last year I wrote a piece for City AM on that year’s Nobel Prize in Economics. It’s on the research involved, why it mattered, and why the Laureates were worthy winners. I thought I’d do a longer piece on this year’s winners for here.

This year it was awarded to Robert Hall and Michael Woodford for their work on the ‘microeconomic foundations of macroeconomic stabilisation’. Fans of the free market have reason to welcome the choice. Both Laureates start from what households and firms actually do, and both treat expectations and credibility as central to policy. It has much to teach John Healey ahead of his Budget at the end of the month and also for the future of the Bank of England.

Hall’s 1978 paper showed that if people smooth their spending over a lifetime, consumption should follow something close to a random walk. This undermined the crudely simple Keynesian view that households spend each extra pound of income. His later work on search and matching treats unemployment as the result of costly decisions by workers and firms. With Charles Jones he argued that differences in national income reflect ‘social infrastructure’, the institutions that make production more rewarding than rent-seeking. Whereas with Alvin Rabushka he co-authored the case for the flat tax.

Woodford’s Interest and Prices gave central banking a formal theory in which expectations, credibility, and rule-like behaviour matter, and in which the objective of policy can be derived from household welfare. This is essentially the framework which underpins inflation targeting and the use of forward guidance by central banks.

So, what can it teach policy makers at the Bank of England?

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Woodford’s central point is important here. He argued that credibility comes from clear commitments. The two per cent inflation target, for example, is such a commitment, and the remit should stay narrow. Adding additional objectives such as climate or financial inclusivity would dilute accountability and make misses harder to judge.

Attention also needs to be given to the Bank’s balance sheet. HM Treasury has had to cover losses on the Asset Purchase Facility running into tens of billions of pounds, because the Bank bought gilts at high prices and now pays Bank Rate on the reserves that financed them. A cost to taxpayers has arisen from decisions taken by the MPC. Asset purchases should therefore be treated as an emergency instrument, with a defined exit and a published statement, before they begin, of who bears the risk. In the meantime the Bank should reduce its portfolio on a predictable schedule, and the Bank and Treasury should publish a joint account of the costs.

Forecasting also needs to be treated with a massive pinch of salt and improve significantly. Ben Bernanke’s 2024 review found weaknesses in the Bank’s models and processes. Estimates of the natural rate and the output gap should be presented as inputs with stated uncertainty, rather than immutable laws of the Universe. The MPC should remember its Milton Friedman and give more weight to money supply growth and credit data. It also needs to pay greater attention to surveys of wage and price setting.

Finally, for the Bank, forward guidance only really works when it is conditional and credible. The unemployment threshold the Bank adopted in 2013 was approached much sooner than expected and had to be replaced. Guidance should be used sparingly, its conditions stated explicitly, and commitments about future rates should not extend beyond what the Bank’s own forecasts can support.

What about for the Chancellor and his team at HM Treasury?

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First, Hall’s work on fiscal multipliers has been cited as a case for stimulus today. This is a misreading of his work as his results apply only when interest rates are at or around zero. This is not the world we are currently living in. Instead of undermining the confidence of the bond markets and playing fast and loose with the public finances, Healey should stick with his current fiscal rules and resist the temptation to fiddle with them by adopting a Public Sector Net Worth target, for example.

Second, Hall and Jones rightly point to the supply side. Stabilisation cannot substitute for growth, and Britain’s weak productivity reflects planning delays, slow grid connections, high energy costs, and a complicated tax system. It is encouraging that the Treasury seems to be taking this more seriously and Dan Tomlinson is doing a good job as the Minister for Growth and identifying barriers to growth on the supply side.

The Treasury needs to double down on this and push through planning liberalisation so that it is much easier and less expensive to build more homes, offices, labs, data centres, and transport and energy infrastructure. It also needs to point to the folly of the frantic push towards Net Zero which has given the UK some of the highest energy prices in the world and has crippled industry. Fundamental tax reform needs to be back on the agenda as well rather than tax hikes or tinkering with the system. A good start would be to bring back the Office of Tax Simplification before eliminating taxes which distort economic activity and hamper growth.

Finally, the work of this year’s laureates have implications for labour market policy.. Hiring costs and the design of out-of-work benefits shape how quickly people move into jobs. Again, it is encouraging that the government appears to be taking the NEET crisis seriously. It is right to want to get young people back into work or into their first job. Unfortunately, several of the policies introduced by Rachel Reeves have directly undermined this. HM Treasury needs to be radical here by reversing Reeves’ hike to Employers’ NI, repealing the Employment Rights Act, and abolishing the Minimum Wage for under 25s.

This year’s Nobel Prize in Economics Laureates are worthy winners. While not infallible, both the Bank of England and HM Treasury would do well to learn some of the lessons from their research.

Other stuff

Last week I wrote an article for the Great British Think Tank. It’s on ‘Made in Europe’ and why the UK shouldn’t allow itself to be coerced into making concessions in order to join it. You can read it here.

I also wrote a piece of CapX. It’s on why Britain shouldn’t levy tariffs on Chinese EVs.

Thanks as ever for reading!

Britain has seen more chaos at its airports this week due to a problem at NATS. While it wasn’t as bad as the situation from the other week, it was still incredibly disruptive. Flights being delayed and cancelled is not just frustrating for holiday makers, it is costly for firms which miss out on the goods and services they need to operate, bad for consumers who may face shortages, terrible for growth and the public finances as the country misses out on much needed investment, and humiliating for the UK as it increasingly resembles a failed state.

NATS is clearly not fit for purpose. It’s high time that the government fully privatised it.

Since the 2001 public-private partnership, NATS has been owned by a patchwork of investors, consisting of the UK government, the Airline Group (a consortium of major carriers), Heathrow Airport, and NATS workers. The government also holds a ‘golden share’ giving it a say in key decisions.

This produces two major problems.

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First, the customers are essentially the owners. The airlines that own NATS are also the people who pay its charges. Their incentive as owners is to keep charges low, which is a perfectly rational thing for an airline to want, but it can mean underinvestment in resilience. Their incentive as customers is the same. Nobody at the top of the structure is a patient long-term investor whose return depends on the network being reliable, well-maintained, and continuously upgraded.

Second, it means that the State is a reluctant and conflicted shareholder. Ministers oversee a business whose economic regulator (the CAA) is also a government body, and whose airspace policy the Department for Transport sets. When something goes wrong, accountability is diffuse. The government is shareholder, policymaker, and ultimately the one blamed by voters, and it has no clear commercial mandate.

This hodgepodge clearly isn’t working for anyone and so NATS should be privatised. If the government sold its stake and extinguishes its golden share, it would remove any perception of leniency or conflict. The CAA would be empowered to act as an entirely neutral, aggressive watchdog, penalising NATS for operational resilience failures or network delays without impacting the State’s own balance sheet asset values.

Privatisation would also bring with it some much needed investment. Air traffic control is an infrastructure heavy business with high fixed costs, long asset lives, and steady, regulated revenues. This is the kind of thing that pension funds and similar investors can’t get enough of.

The UK has a real modernisation backlog: ageing legacy systems, the transition to digital towers, and a long-overdue redesign of airspace that has barely changed since the 1950s and 60s (I intend to write something about reforming the UK’s airspace soon).

Given the parlous state of the public finances, the government faces a trade-off between funding this and funding hospitals or schools. A privately owned NATS, can raise capital against its own cash flows instead. A sale would also bring in a tidy sum which could be used to help pay down the National Debt.

Privatising NATS will also improve efficiency and increase accountability. This can be achieved in three main ways.

First, it will lead to true cost discipline. Privately owned regulated utilities are typically incentivised to spend their money and other resources more wisely (it’s their money, not taxpayers’) and ensure they get the best bang for their buck. This is the key mechanism that drives efficiency in privately owned infrastructure and should apply to NATS.

Second, there will be clearer performance sanctions. A privately owned NATS can be fined, can lose its licence, and can see its equity value fall after a failure. Shareholders bear real losses when reliability slips.

Finally, it will be easier to fire the boss. A private board answers to owners who want the business to perform, and can replace management without a ministerial reshuffle or a political storm. Under the current arrangement, a chief executive is accountable to a board split across airlines, the State, and other stakeholders. Each has different priorities and successive governments have a terrible track record of getting rid of underperformers. A single, clear, profit-motivated owner sharpens the question of who is responsible when things go wrong and will be far less shy about telling them to pack their bags.

There are, of course, national security concerns here. However, I don’t think these are insurmountable. The government would still be within its rights to vet and potentially veto investment from countries with links to China, for example.

So, there we have it. NATS isn’t working as it should and it’s deeply damaging to the UK, its economy, and its reputation. The ownership structure and a lack of investment and clear accountability are the main problems. Privatising would tackle all three and so the government should do it.

Other stuff

Yesterday I wrote an article for CapX. It’s why Trump kind of has a point about non-tariff barriers to trade and why the government should scrap the Digital Services Tax and the Online Safety Act. It’s also why the Lib Dems were wrong to call for a ‘tech levy’ at their Conference yesterday. You can read it here.

Thanks as ever for reading. I’ll no doubt write other stuff this week but right now I’m off to the FIFA Museum!

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This past week the news has largely been dominated by the news that Canada wants to have a much closer relationship with the EU and ‘Associate Membership’ has been suggested by both sides. This has been jumped on by many of the usual suspects who have still not got over Brexit and are desperate for Britain to rejoin the EU. They have stated that Canada will now have a closer relationship with the EU than the UK has and because someone as smart and great as Mark Carney has recognised the importance of forging close ties with the EU then it naturally follows that the UK should do the same.

While I am quite a big fan of Carney and I think he’s doing an excellent job of running Canada and he is handling the Trump issue well, many of the claims being made are largely nonsense.

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We don’t really know what ‘Associate Membership’ is or what it would entail. For example, what rights would it give to Canada and what obligations would it impose on it? I suspect the answer to both would be ‘very little’. There is a danger that ‘Associate Membership’ would therefore be a bit like BRICS where countries want a world and a system where America is not the hegemon and so they meet up every so often for a chat. In other words, it’s pretty meaningless.

Moreover, it is incredibly unlikely that ‘Associate Membership’ would entail a closer relationship with the EU than the TCA between Britain and the EU which is arguably one of the most comprehensive trade deals in existence. Unless Canada decides to join the Single Market and/or the Customs Union (it won’t – more on that later), it won’t be a closer relationship than the one enjoyed by the UK.

What I mainly want to argue in this post though is that while it is sensible for Canada to be less reliant on the US given how unreliable it is and how appalling Trump is, it still makes sense for Canada to prioritise its trading relationship with America in the long run rather than binding itself to the EU.

First up, we need to talk about gravity. The Gravity Model is still of fundamental importance when it comes to trade. In short it states that trade between two countries or blocs scales with the size of their economies while shrinking sharply with distances. It has always been the case and still holds up remarkably well in an era of container ships and digital services. Distance still matters enormously because it proxies for transportation costs, time-sensitivity of shipments, cultural and regulatory familiarity, supply-chain integration, and the ease of doing business face-to-face.

There is a certain irony in pro-EU enthusiasts in Britain forgetting this. They rightly pointed out that one or two trade deals with smaller economies thousands of miles away would in no way make up for the economic hit of having a worse trading relationship with a massive trading bloc on our doorstep. While not a remainer myself and being very much in favour of the FTA signed with Australia (I worked on it), I made this very point in the Critic a few years ago where I responded to the claims made by Professor Patrick Minford that it would significantly boost UK GDP.

Canada and the United States share a 5,525 mile border, a deeply integrated manufacturing base (especially in autos and machinery), common language in most commercial contexts, harmonised-enough regulatory standards, and decades of just-in-time supply chains that crisscross the border multiple times. None of that infrastructure or embedded efficiency transfers to a relationship with the EU, which sits roughly 4,000 miles away across the Atlantic Ocean, uses a different regulatory and standards regime, and has its own dense set of internal supply chains that Canadian exporters would be entering from the outside.

This is why, even with CETA in force since 2017 and provisionally applied for years before that, the needle has barely moved. The US still absorbs roughly three-quarters of Canadian goods exports; the EU’s share sits in the mid-single digits. Trade agreements can reduce tariffs and harmonize some rules, but they cannot repeal geography. A trade deal is necessary but nowhere near sufficient to reroute the gravitational pull of proximity. In the words of one of my favourite bands, Placebo, ‘Gravity, no escaping gravity. Not for free…’ The song is about abusing ketamine, but it still stands.

Advocates of a Canadian pivot to Europe often point to CETA as precedent. However, CETA’s actual trade effects have been underwhelming relative to expectations (and is one of the reasons why the previous Canadian government was enthusiastic about enhancing the deal with the UK). The impact of CETA has mainly consisted of modest increases in bilateral trade, concentrated in a handful of sectors. If a deal already exists and the reallocation of trade flows away from the US hasn’t happened, that’s strong evidence the binding constraint isn’t tariff schedules. Rather, it’s the underlying economic geography and the structure of existing supply chains. To quote another one of my favourite bands, Radiohead, ‘Gravity always wins’.

The relative failure of CETA hasn’t been helped by the fact that ten EU nations still haven’t ratified it. This brings us onto the next issue: farming.

Canada’s supply-management system for dairy, poultry, and eggs is one of the most tightly protected agricultural regimes among developed economies, defended fiercely by a concentrated and politically potent set of producers, especially in Quebec and Ontario. It essentially operates as a cartel. As an aside, they also have terrible animal welfare standards – during one of the many Covid Lockdowns I found myself in a gloomy room in the bowels of the FCDO reading about it and the way they treat their cattle was almost enough to make me vegan.

Any Canadian government that has gone near the supply management racket in trade talks (CETA, CPTPP, NAFTA, the enhanced deal with the UK etc) has fought to carve out the smallest possible concessions, because the domestic political cost of opening these markets is severely out of proportion to their economic weight. I don’t even think that Carney (who appears to have an actual genie working for him) will be able to sort it out.

I’ve gone on a lot about this before but the EU has its own version of this problem, arguably worse. The Common Agricultural Policy remains one of the most heavily subsidised and protected sectors in the world, and European farmers are not a quiet interest group. French, Polish, and Irish farmers have repeatedly shown they can shut down capitals with tractors when market access concessions threaten them. EU trade negotiators have to answer to that constituency, which is why the EU has slow-walked or diluted market access for Canadian beef, pork, and other agricultural exports even under CETA, citing sanitary and phytosanitary rules that Canadian producers view as thinly veiled non-tariff barriers. As I’ve written before, it’s why sadly Ukraine won’t be allowed to join anytime soon and why there is going to be a ban on beef from Brazil.

In short, neither side has a domestic political coalition willing to make the concessions that would be needed for agriculture to flourish under closer EU-Canada ties. Two protectionist agricultural lobbies negotiating with each other does not produce a breakthrough. Instead it produces exactly the kind of shallow, symbolically important but practically limited deal that CETA became. As discussed above, it will likely be as meaningless as BRICS.

None of this means Canada shouldn’t maintain and even deepen the EU relationship at the margins. Canada is a force for good in the world and so is the EU. However, treating the EU as a substitute for the American market, rather than a supplement to it would be a mistake.

The more strategically sound position would be to treat the current friction with Washington as a cyclical, personality-driven disruption rather than a structural break, and to manage the relationship accordingly: maintain USMCA discipline, keep dispute-resolution channels open, and wait out the tariff volatility while continuing quiet diplomatic and business-level engagement. The underlying gravity (economic size, distance, integrated supply chains, energy interdependence) hasn’t changed, and it will continue to pull Canadian trade back toward the United States regardless of who occupies the Oval Office.

All of this, again, demonstrates why the UK has (largely) taken the right approach to trade post-Brexit and why it should not rejoin the Customs Union. We have a close trading relationship with the EU and that’s incredibly important and the government should cherish that and look at ways to reduce friction and make trade even easier.

However, it’s a big and uncertain world where old friends and allies cannot be relied on and the country needs to be flexible and adapt. Therefore, it is foolish to be tied too tightly to one particular nation or bloc and instead strive to build relationships and trade freely with as many nations and blocs as possible.

From the archives

As Greenland is in the news again due to the action of Mr Trump, here is something I wrote for CapX all the way back in February 2022. It’s on why the FBPE set were wrong to disparage a trade deal between the UK and Greenland given Greenland’s geo-strategic importance.

Thanks as ever for reading. I’ll no doubt write a few more things this week here and elsewhere. Enjoy the rest of your weekend!

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When he was the Greek Finance Minister, Yanis Varoufakis rocked up to 10 Downing Street clad in a leather jacket for a chinwag with George Osborne. During the small talk Osborne apparently said to Varoufakis that they were quite similar as they were both implementing austerity. Varoufakis retorted: ‘While we may disagree on the merits of austerity, you are not really doing much of it, George, are you?’ to which Osborne apparently agreed.

Whether or not Varoufakis was correct is obviously open to debate (he often isn’t). As I wrote the other week, people in recent years tend to hold to a narrowly restrictive definition of ‘austerity’ and the UK did experience some form of ‘austerity’ as it did make some cuts to public spending and increased some taxes. Regardless, today I want to focus more on what Greece did and what lessons that holds for Britain. This has been inspired in part by the news that the current Greek Finance Minister has encouraged Germany to implement reforms, and all the glorious memes this has generated.

Back in 2012, Greece was a cautionary tale told by centre-right politicians to their electorates. Its economy had shrunk by roughly a quarter from its 2008 peak. Unemployment would eventually top 27 percent. The State had restructured its debt in the largest sovereign default in history, and almost everyone was talking about when not if it would leave the Euro and perhaps even the EU itself.

Fast forward to today and Greece has grown faster than the Eurozone average for several years running, unemployment has fallen, and the major rating agencies have returned the country to investment grade after more than a decade in junk territory. Foreign investment is at record levels, and the banking system – once buried under a mountain of bad loans – is actually functioning again.

So, how did we get here?

To understand the turnaround, you have to understand what was broken and why. Before the crisis, Greece’s growth was driven largely by cheap credit and public spending rather than actual productive activity. Product markets were riddled with barriers: licensing requirements for dozens of professions, from lawyers to truck drivers, that limited entry and propped up prices. Labour markets were rigid, with centralised collective bargaining and high hiring and firing costs. Tax evasion was endemic, and the State’s administrative capacity was weak.

The result was an economy that had a bloated public sector, was uncompetitive, and poorly suited to the Euro. Once the credit taps were turned off, there was no export sector large enough to take up the slack.

The Greek government turned things around in five steps.

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First, it restored competitiveness through labour market reform. The reason why many people felt that Greece would/should leave the Eurozone is because when nations typically find themselves in such a pickle, they devalue their currency to make themselves more competitive. This option obviously was not open to the Greeks. As such, it had to adjust wages and costs directly.

The 2012 measures cut the minimum wage, weakened the automatic extension of sectoral collective agreements, and allowed firms to negotiate at the company level. Severance costs were reduced, and rules on temporary and part-time work were loosened. The result was a steep fall in unit labour costs, which helped restore price competitiveness. The current account deficit, which had been around 15 percent of GDP in 2008, closed significantly.

This was very painful and politically costly, but this more flexible labour market is a large part of why the recovery, once it took hold, was so employment-rich. Unemployment fell from its peak above 27 percent to just under 8 percent, with hundreds of thousands of net new jobs created.

The second step involved opening up its markets. Alongside the labour market reforms came a slower, less dramatic effort to pry open protected sectors. Working with the OECD, Greece identified regulatory barriers across retail, transport, energy, tourism, and professional services. Reforms loosened restrictions on trading hours, eased rules for opening businesses, and started dismantling licensing regimes that ‘protected’ incumbents from competition.

Some of the most visible and effective changes came through privatisation. The sale of a majority stake in the Port of Piraeus to COSCO turned a sleepy, strike-prone facility into one of the Mediterranean’s busiest container hubs. Fraport took over fourteen regional airports, investing heavily in modernisation and helping to drive record tourist arrivals. The long-stalled Hellinikon project, a huge coastal redevelopment on the site of Athens’s old airport, finally got moving.

The third step involved fixing its banking sector. By 2016, nearly half of all loans on Greek bank balance sheets were nonperforming, which meant credit to healthy businesses was scarce. This, to put it mildly, was sub-optimal.

The solution combined several elements: recapitalisations, insolvency reform, an electronic auction system for foreclosures, and the Hercules asset protection scheme (which allowed banks to securitise and offload bad loans with a state guarantee that was carefully designed to limit taxpayer risk). As a result, nonperforming loan ratios fell to the mid-single digits. Banks are now profitable, lending to households and firms again, and able to attract international investors. Quite remarkable when you remember that the government had previously had to enforce capital controls and bring in emergency ‘Bank Holidays’.

Step four focused on tax and business environment reform. Corporation Tax was cut significantly. Dividend taxation and employer social security contributions were also reduced. Incentives were introduced to attract investors and skilled foreign residents, and a fast-track investment approval process aimed to cut the notorious bureaucratic delays that had deterred foreign capital.

Perhaps the most underrated reform in this step was the digitisation of the state. The gov.gr platform moved hundreds of services online, and mandatory electronic invoicing and payment tracking cut into the shadow economy. Tax compliance rose, narrowing the VAT gap and giving the government revenues without needing to raise headline rates. Greece essentially paired tax cuts with stronger enforcement and so it is hardly surprising that revenue increased.

Finally, the Greek government grasped the nettle of welfare reform. It cut pretty much all forms of working age benefits in order to reduce public spending and incentivise work. It also reduced State spending on healthcare by introducing charges and co-payments for medical treatment. Crucially, it also reformed pensions. It cut public sector and the State pensions, reduced or eliminated many pension ‘bonuses’ such as holiday payments, and it increased the State Pension Age so people had to work longer.

The clearest signal of the turnaround came from the bond market. Greek ten-year yields, which spiked above 30 percent at the height of the crisis, fell to levels comparable with other southern European economies. Investment-grade ratings returned in stages, with several major agencies upgrading Greece in 2023 and beyond. Public debt, which peaked around 200 percent of GDP, has been falling quickly, helped by primary surpluses, strong nominal growth, and early repayment of some official loans.

This matters because credibility is the thing markets really care about. A government that follows through on structural reforms, hits its fiscal targets, and stays out of headlines buys itself lower borrowing costs, and that creates a virtuous circle in which lower interest burdens free up fiscal space, allowing further tax reductions and more investment.

The turnaround of the Greek economy has been remarkable but it has also been painful. Productivity growth is not as high as it should be and many of its young and ambitious people left the country entirely. However, it does have a lot to teach Britain and other highly advanced economies.

While thankfully the UK is not really comparable to Greece at the height of the crisis (and it was disingenuous for Osborne and Cameron to suggest that it was at the time), the country is not in a good place. As I’ve written repeatedly, the UK is seeing gilt yields spike because investors don’t believe that the government has the willingness or the ability to cut public spending and bring in structural reforms which will drive growth.

The current government has paid lip service to Welfare reform but its attempts to do so under Sir Keir Starmer were thwarted by his own MPs. The opposition parties have said that they will cut working age benefits but they have, for the most part, ruled out making reforms to the State Pension. This is a mistake, the Triple Lock needs to be abolished and the State Pension needs to be frozen for a number of years and the age at which it can be claimed should be increased.

The other sacred cow which needs to be slain is the NHS. The Health Budget is the same size as the entire GDP of Portugal while failing patients, staff, and taxpayers. The government should introduce a system of charges and co-payments before ultimately moving to a social-insurance style system.

Britain also risks moving further in the wrong direction. Greece introduced positive tax reforms whereas successive UK governments have increased complexity by introducing new taxes and different rates while the current government and opposition parties talk of further eroding the tax base by bringing in more exemptions to VAT or raising the tax-free Personal Allowance. Instead the country needs to reform VAT and lower the Personal Allowance to increase revenue and allow more economically damaging taxes to be cut and abolished.

Moreover, while the Greek government recognised the importance of its banking sector, the current government sees it as more of a problem, with the Chancellor refusing to rule out more taxes on the major banks in his Budget. This is the last thing the economy needs. Instead, it should be cutting taxes and lowering the regulatory burden on financial services in order to boost productivity growth.

Likewise, Greece recognised the impotence of privatisation. The UK government seems set on increasing the size of the State by nationalising key sectors of the economy. This is a mistake and the government needs to rule out future nationalisations and the opposition parties need to pledge to re-privatise any industries that are brought into public ownership.

Finally, the government needs to look at the labour market. Unemployment has increased and this is a particular issue for the under 25s and also the over 50s. The UK used to have a relatively flexible labour market but it has become increasingly inflexible and the trade unions are calling for even more restrictions and regulations. The government needs to urgently repeal the Employment Rights Act, lower the minimum wage, abolish the minimum wage for under 25s, and reverse Rachel Reeves’ increase to Employers’ National Insurance.

All of this will be politically difficult and will cause some pain. However, it is essential that the government implements at least some of these structural reforms now to avoid being forced to implement real, full-fat austerity after being bailed out by the IMF in a few years.

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Other stuff

This past week I was in City AM as part of my role on its shadow MPC. I voted with the majority for Bank Rate to be held. You can read why here. I also wrote a piece for the Great British Think Tank on why the Bank of England should pause QT which you can read here.

Thanks as ever for reading. I’ll no doubt write something else this coming week but I’m currently in Switzerland and will be travelling. Enjoy your weekend!

Robert Jenrick has pledged to raise the VAT registration threshold from its current level of £90,000 to £150,000 if Reform UK forms the next government. As with his call to increase the tax-free Personal Allowance he announced last week it is encouraging to see that Reform are thinking about tax policy and that they understand that there is a link between the tax burden and growth.

However, as with the Personal Allowance announcement, raising the VAT registration threshold would also be a mistake. Rather than increasing the threshold, the government should lower it instead.

Before getting into the threshold itself, it’s worth noting briefly why VAT is a tax worth protecting and even leaning on more, rather than eroding further. For those of you who have been subscribers for a while and have read other things I’ve written will know that in so far as one can be, I’m a big fan of VAT. It is one of least economically damaging ways for the government to raise revenue. There is a great deal of evidence that shows that a well-designed VAT is a highly efficient way to raise revenue compared to the alternatives. Problems arise when it is riddled with exemptions, different rates, and high registration thresholds.

Britain is something of an outlier when it comes to its VAT threshold. At £90,000, it is the joint-highest nominal threshold in the OECD, and on a purchasing-power-parity basis it ranks third among 38 OECD countries (behind only the Czech Republic and Italy) at roughly double the average threshold among the 31 OECD members that apply one at all. The average EU threshold sits closer to €31,000, and the OECD average closer to $49,000. France, Germany, and most of the EU require businesses to register at a small fraction of the UK level. This comparison is set out well in Alex Mengden’s 2025 Tax Foundation piece. Obviously we shouldn’t be doing something just because everyone else is (Milhouse jumped off a cliff?) but it should at least give us pause for thought.

The VAT registration threshold acts as a significant barrier to growth. At £89,999 of turnover a business owes no VAT; at £90,001 it must charge VAT on effectively all of its sales going forward, with no phase-in. This is a huge cliff edge. In the real world when you come to a cliff edge, you stop (or at least you should). Firms respond in the same way, by stopping just short of them.

There is a great deal of evidence for this. For example, Almunia, Liu, Lockwood, and Tam documented sharp ‘bunching’ of British firms in the turnover distribution just below the threshold (far more firms report turnover just under the cutoff than a smooth distribution would predict).

Even more strikingly, a follow-up IMF working paper by Liu, Lockwood, and Tam (2024) moved beyond the static bunching picture to look at what happens to firms’ growth over time as they approach the threshold. Using UK administrative tax data, they find that annual turnover growth slows significantly as firms approach the threshold, and that this slowdown persists rather than reversing once the threshold is passed. Crucially, firm cost growth slows in the same way as turnover growth. Businesses start turning down work, capping hours, or declining new clients. Firms that voluntarily register regardless of turnover show none of this slowdown, and firms on the VAT Flat Rate Scheme show a smaller effect, both consistent with the threshold itself, rather than something else, driving the pattern.

The (unfairly maligned) Office for Budget Responsibility has calculated the aggregate effect. It estimated that the distortion to business size caused by the threshold cost around £350 million in lost turnover in 2023 alone (perhaps we should stick that on the side of a big red bus). As such, it is a policy actively encouraging small businesses to stay small. It is the precise opposite of a pro-growth measure. A government that wants firms to invest, hire, and scale up should not be maintaining a tax feature whose main measurable effect is to make them stop growing at £90,000.

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At this point you might be agreeing that the VAT registration threshold is a growth barrier but that might lead you to conclude that we should therefore raise the threshold. That’s perfectly understandable but it would be wrong. Doing so would be massively expensive and create a massive blackhole in the public finances.

The very same OBR analysis discussed above found that simply freezing the threshold at £85,000 rather than raising it (let alone lowering it) would have raised an additional £1.4 billion a year in VAT revenue by 2027–28. As such, lowering the threshold substantially, rather than just holding it, would raise considerably more than that, since it would pull far more of the roughly 3.6 million currently-unregistered small businesses into paying VAT. Given that VAT already accounts for over a fifth of total UK tax revenue, even modest changes to the base move large sums.

The Institute for Fiscal Studies has been blunt about the scale of the fiscal gap the government is trying to close and the narrow list of levers available to close it without breaking its Manifesto commitments on the Big 3 taxes (another reason why Rachel Reeves was wrong to tie her own hands). Against that backdrop, continuing to raise a threshold that is already among the highest in the OECD and giving up over a billion pounds a year in the process is the wrong approach.

We should obviously be slashing public spending in order to reduce the deficit and lower the National Debt while also raising the Defence Budget. Unfortunately, successive governments have (and likely will) continue with high levels of government spending and economically harmful tax hikes. Lowering the VAT threshold (and broadening the base) will allow the government to raise much more money and cut and eliminate much more distortive taxes such as National Insurance Contributions, Corporation Tax, and Stamp Duty.

At this point you might now be in complete agreement that the threshold is a barrier to growth and that it is set far too high. Therefore, it is natural to ask why we shouldn’t just abolish it entirely. This would also be a mistake.

This is because despite it being an efficient revenue raiser, VAT is a relatively complex tax to comply with. There is a real administrative and compliance cost to bringing very small taxpayers into paying the tax. What is more, below some turnover level that cost exceeds the revenue and efficiency gains from doing so.

Pulling millions of the country’s sole traders and micro-businesses into VAT overnight such as market traders, sole-trader tradespeople, small consultancies would be an administrative nightmare for (the deeply incompetent) HMRC. It would be disproportionate to the revenue gained from firms turning over, say, £10,000–£20,000 a year, and would impose real compliance costs on people least equipped to absorb them.

The current threshold is too high, raising it would be a mistake, and we shouldn’t eliminate it entirely. So, how low should we go?

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The sensible landing point is probably somewhere close to where most of the UK’s peer economies already sit: in the region of £30,000, broadly in line with the EU and OECD averages, rather than nearly triple them. That would still exempt the very smallest and most casual trading activity from VAT’s compliance burden, while ending the absurdity of a £90,000 cliff-edge that no other major advanced economy replicates at anything like the same scale.

Two design features would make a lower threshold much less painful than a crude cut, and much less of an administrative burden on HMRC.

First, HMRC should pair any reduction with genuine simplification of VAT filing for small traders such as better digital tools, simplified flat-rate options, and clearer guidance so the marginal compliance burden of registering is as low as practically possible.

Second, the government should seriously consider softening the notch itself, for example through a marginal-relief mechanism that phases in VAT liability gradually over a band above the threshold rather than imposing it in full from the first pound over the line. The Office of Tax Simplification (of blessed memory) conducted a review of VAT floated smoothing mechanisms of exactly this kind, precisely because it is the cliff edge, not VAT itself, that drives the bunching and growth-slowdown effects documented above.

So, there we have it. It’s great to see that Reform are thinking seriously about tax reform (the other parties should go and do likewise). However, raising the VAT registration threshold would be a mistake. Instead the government should significantly lower the threshold to around £30,000 as part of a package of tax reform including removing the vast majority of VAT exemptions and rates. Doing so would get the pain out of the way earlier for small firms and allow them to grow. It would also allow the government to abolish and cut far more damaging taxes such as Stamp Duty, Corporation Tax, and National Insurance Contributions.

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Thanks as ever for reading. I’ll probably write a few more things this coming week. Have a great weekend!

Today I want to talk rubbish (unkind people might say I do that everyday), specifically I want to discuss Landfill Tax. We should abolish it. Here are a few reasons why.

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The tax was initially introduced as a way to price the environmental cost of burying waste rather than recycling or reusing it. That was a reasonable starting principle (I’ll expand on the ‘was’ part of this later). However, almost exactly 30 years on, the tax has become one of the most significant and least-discussed cost pressures facing British firms that generate large volumes of physical waste. Nowhere is that more acute than in construction and related industries.

Construction, demolition, and excavation waste makes up by far the largest waste stream in the UK, larger than household and other commercial waste combined. Unlike a retailer that can redesign packaging or a manufacturer that can tweak a production process, a demolition contractor pulling down an old building, or a groundworks firm digging foundations, produces rubble, contaminated soil, plasterboard, and mixed inert waste more or less as an unavoidable by-product of the job itself. Much of this material simply cannot be eliminated by ‘trying harder’ to be efficient.

That matters because Landfill Tax is essentially a Pigouvian tax. I’m a big fan of Pigouvian taxes as they deal with negative externalities which impose costs on third parties (and they generally do a pretty good job at this). However, a Pigouvian tax is supposed to change behaviour at the margin. When the marginal unit of waste can’t be avoided, the tax stops functioning as an incentive and starts functioning as a straightforward cost of doing business. In the case of Landfill Tax it’s one that lands disproportionately on an industry that didn’t choose to generate that waste so much as inherit it from the site. Landfill tax is not working as it should.

Furthermore, the cost of Landfill Tax is now large enough to distort project economics. For a house-builder or infrastructure contractor, landfill tax is frequently one of the largest single line items in a project’s waste budget, and for excavation-heavy projects such as deep foundations, basements, contaminated brownfield remediation, the tax on the material removed can run into hundreds of thousands of pounds on a single site. Brownfield regeneration is hit particularly hard: land that’s contaminated from previous industrial use often has to have soil excavated and disposed of at the higher rate, which makes remediating exactly the sites the planning system (and the NIMBYs who game it) claim it wants developers to prioritise more expensive relative to building on greenfield land. That’s a frankly bizarre incentive to build into a tax system at a time when housing policy is explicitly trying to steer development toward brownfield sites first.

Smaller contractors feel this even more acutely than large housebuilders. While a large developer can spread Landfill Tax costs across a large pipeline of sites, negotiate volume rates with waste contractors, and absorb the occasional bad site, a small or medium-sized building or demolition firm working on a single project at a time has none of that flexibility. The tax bill on one contaminated site can be the difference between a viable margin and a loss-making job, with none of the working-capital cushion a larger firm has.

There are problems beyond the tax itself. Construction firms carry a heavy compliance burden: waste transfer documentation, duty of care records, correct waste classification (often requiring chemical testing of soil to determine which rate applies), and exposure to penalties if a waste stream is later found to be misclassified. For firms already managing tight margins on fixed-price contracts, this is a meaningful administrative cost layered on top of the tax itself, and it scales badly for smaller firms without in-house environmental compliance teams.

Regular readers of this blog will be aware that I think that the UK’s failure to build anything is one of the main reasons why productivity growth is so low in this country. The main culprit here is the restrictive planning system and the NIMBYs who use it to their advantage to make it much more difficult (and expensive) to build homes, offices, labs, data centres, and energy and transport infrastructure. Not only is this a problem for economic growth it is also an issue for the construction industry and the livelihoods which depend on it. All of these problems are exacerbated by Landfill Tax.

Moreover, as the tax is a large, visible, and hard-to-avoid cost specifically on construction and demolition sites, it has also created a strong incentive for waste crime within the sector. For example, illegal waste sites and ‘misdescription’ of waste (declaring hazardous or non-inert material as lower-taxed inert waste to qualify for a reduced rate) are recurring enforcement problems flagged by the (hapless) Environment Agency, and construction and demolition waste is one of the streams most associated with fly-tipping and unlicensed disposal. Compliant firms end up competing on price against cowboys who are avoiding the tax altogether, which punishes the contractors doing the right thing and rewards the ones cutting corners. That’s the opposite of what a well-functioning tax should do to a competitive market.

At this point you might be thinking that despite all these problems with Landfill Tax, it is worth it if it encourages households and firms to recycle more. While this makes sense, I don’t actually think it’s a strong argument. I turn your attention to the excellent piece in Works in Progress by Alex Chalmers and Rob Wiblin. They make the case that simply dumping your waste at a landfill site is often much more environmentally friendly than recycling it. As such, we really shouldn’t be trying to use the tax system to incentivise recycling as opposed to using rubbish dumps and so arguably Landfill Tax is surplus to requirements.

As is often the case, I found myself agreeing with Dan Neidle this morning. He’s right that the public finances are not in a position right now where we can be seriously talking about tax cuts (at least not without a plan to first cut public spending).

However, I think we should make an exception for Landfill Tax. For all the cost and distortion outlined above, the tax barely moves the needle when it comes to the public finances. HMRC’s provisional figures put Landfill Tax receipts at £486 million in 2024/25, against total UK tax receipts of roughly £858.9 billion the same year. The tax accounts for a tiny proportion of total revenue. It isn’t even a significant environmental tax in its own right: Climate Change Levy and Carbon Price Floor receipts alone came in significantly higher in the same year. What is more, the trend is downward as Landfill Tax receipts have fallen by more than half over the past decade, from £1.189 billion in 2013/14 to £486 million now, as waste has shifted toward recycling and energy-from-waste incineration as well as due to fly-tipping.

The damage it causes relative to the revenue it raises is simply not worth it. What is more, given that abolishing it would provide a boost to the construction industry which in turn would lead to productivity gains and economic growth we should expect to see revenue from other taxes increase as a result.

So, there we have it. Landfill Tax is pretty rubbish as a Pigouvian tax, increases the cost of doing business for a key industry, and raises very little revenue in proportion to the economic damages it causes. Time to dump it.

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Thanks as ever for reading. I might write something else this week.

Today the former Chancellor, had a very good post on the importance of increasing public sector productivity for the sake of the public finances. He’s absolutely right and it’s an issue which is close to my heart as I briefly worked on public sector productivity at HM Treasury. It’s a fascinating topic and there is a lot I could write about it (and I probably will do at another time) but today I shall limit myself by focusing on a point which Hunt alluded to but didn’t dwell on, namely the power of public sector unions.

In a normal labour market, a trade union’s leverage is checked by the employer’s exposure to competition. If they push wages or working conditions too far then the firm loses customers, market share, or eventually goes bust.

However, public sector unions face no such constraint in the UK. They are essentially employed by the State and their ‘customers’ are taxpayers and their loved ones who cannot switch providers. Moreover, their strikes don’t threaten a competitor’s profits. Instead they threaten a child’s exam, a patient’s operation, or a commuter’s ability to get to work.

In short, they have far too much power over the lives of the rest of society. This should not be read as hostility to organised labour as such, but rather me pointing out that the normal market discipline which makes collective bargaining broadly benign in the private sector is almost entirely absent when it comes to the public sector.

A private sector strike internalises most of its costs onto the two parties actually bargaining: the firm loses revenue, the workers lose wages, and both have a strong incentive to settle quickly. A public sector strike is completely different. The bulk of the cost lands on a third party who has no bargaining power such as a sick person, a child, or a commuter. This is a textbook negative externality, and economic theory teaches us that when a party can impose costs on others without bearing them itself, that party will tend to overproduce the harmful activity relative to the socially optimal level. In short, we should expect public sector unions to be much more trigger happy about calling strikes.

That’s why the government needs to significantly raise the bar for calling a strike. We need higher turnout thresholds, mandatory cooling-off periods, and minimum service guarantees in order to actually increase productivity and reduce the burden on the public.

This is precisely the logic behind minimum service levels in transport, healthcare, and education, which several European countries with a much less adversarial reputation than Britain’s already enforce. Even France, with all its history of militant strike action, has statutory minimum service requirements on its railways.

There’s also a deeper structural point beneath all of this. Public sector pay and staffing decisions are ultimately made by politicians facing election cycles, not by profit-maximising firms facing bankruptcy. That gives public sector unions a second, less visible form of leverage beyond the strike weapon itself: the ability to make life difficult for a government that wants to be re-elected. The unions can hold the government to ransom.

Wage settlements agreed under this kind of political pressure don’t track productivity, revenue, or the opportunity cost of the money. Instead they track the government’s tolerance for disruption in an election year. Over time this can produce a ratchet effect in public sector pay and headcount that has little to do with underlying fiscal capacity, which is one reason public sector pay bills have proven so difficult for successive governments of both parties to control once committed.

As such, it should be so much harder for public sector workers to go on strike (and illegal in some sectors) so that time is not lost to industrial action and the public actually receive the services which they pay for.

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We also need to take a look at ‘Facility Time’. This is essentially paid hours during which public workers carry out trade union duties rather than the job the taxpayer is funding them to do. Some of these employees are named ‘Pilgrims’ and dedicate themselves entirely to union activity at the taxpayers’ expense.

This cost is diffuse and buried inside departmental payrolls and so it escapes the scrutiny that a comparable direct grant to a union would attract. However, as public bodies are required to publish facility time data and so we have at least some idea how much money is spent on facility time. Even by the low end of recent estimates the numbers are not trivial: across roughly three dozen central government departments, the reported bill for facility time in 2024/25 ran to around £13.75 million. Broader whole-public-sector counts, which include councils, health bodies and transport authorities, run considerably higher. This amounts to a payroll subsidy to trade unions, funded by taxpayers. This is money (and time) which should be spent on civil servants and other public sector workers actually doing their jobs.

As an aside, it’s not just facility time which is an issue here. When I joined the civil service I signed up to a number of staff networks (which I think are largely a good thing). I was shocked to be invited to events such as ‘Virtual Bake Off’ taking place during working hours. I’m sure it was all good fun and was a bonding experience but it was surely highly inappropriate for this to take place while officials should have been working. I’ve been a member of similar staff networks in the private sector and these events always took place after work or during lunchtime – we did not expect to be paid to do something unrelated to our jobs.

Things look set to get even worse due to the dreadful Employment Rights Act. This has removed a reserve power from ministers which previously allowed ministers to restrict facility time in the public sector. This is a step in the wrong direction and we should expect to see further declines to public sector productivity. It will be taxpayers and the users of public services who suffer as a result.

So far it might sound as though I am being very harsh on public sector workers. I actually have a lot of sympathy for them given the monopsony power of their employers such as the NHS. I’ve written about this before in the context of junior doctors and it goes beyond the scope of this post but it’s an argument for the State to do far less and for many of these services to be provided for by the private sector (I might write something on this at a later date).

There are lots of things we can do to boost public sector productivity such as greater use of automation and shrinking the size of the Civil Service (points which Jeremy Hunt himself makes).

However, we cannot ignore the malign influence of public sector unions and so any future government must commit to curbing their powers and outlawing facility time. Doing so will increase public sector productivity leading to lower taxes, a smaller State, and higher economic growth.

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Other stuff

I wrote a piece for CapX on Monday. It’s on the current Chancellor’s decision to lower the Green Book discount rate and why I think that’s a bad idea. You can read it here.

Thanks as ever for reading. I’ll probably write something else this week as well.

In his first major speech as Prime Minister, Andy Burnham blamed, among other things, ‘austerity’ for the state of the UK economy. It was quite predictable from a left leaning politician and the response from those on the centre-right were equally predictable. For a long time the ‘austerity’ of the Coalition government has been an attack line from left wingers. Conservatives and others on the right then respond by (righty) pointing out that public spending has remained elevated over the past 15 years and so they ask ‘what austerity?’

While I have a lot of sympathy for the argument of those on the right, Burnham is actually correct to lay at least some of the blame at the door of George Osborne for his ‘austerity’, but not for the reason the Prime Minister thinks.

This is because when people talk of ‘austerity’ they almost always mean ‘spending cuts’. However, this is only half of the story. I’ve written about this before but it often seems like it is only myself and Tom Forth who still hold to the traditional definition of austerity: fiscal consolidation through spending cuts and/or tax rises. In the UK context the economy experienced this traditional form of austerity as there were some spending cuts and there were also tax rises. This was a huge mistake by George Osborne and partly explains why productivity growth has been so sluggish in the UK since the Global Financial Crisis.

Given that the new Chancellor’s team is trailing that he will tell the country it needs to prepare for a ‘tough Budget’, it looks as though there will be more tax increases announced in October. This risks repeating the mistakes of the past. If there is to be a ‘tough Budget’ and a form of fiscal consolidation then it should come in the form of spending cuts only.

This is because a review of the economics literature reveals that when it comes to fiscal consolidation it depends enormously on how you do it. A large and fairly consistent body of research finds that deficit reduction built mainly on spending cuts has a much better growth track record than deficit reduction built on tax increases (and in some cases the spending-cut version has been associated with faster growth even in the short run, while the tax-heavy version reliably slows the economy down). This is sometimes called the ‘composition’ result, and it’s one of the more robust, albeit still contested, findings in modern fiscal policy research.

The idea that austerity can be ‘expansionary’ sounds like an oxymoron. If a government spends less or taxes more, textbook Keynesian logic says aggregate demand falls and output falls with it. But starting in the 1990s, a line of research associated with Alberto Alesina, Silvia Ardagna, Roberto Perotti, and various co-authors argued that the size of a fiscal adjustment mattered less than its composition. Essentially whether the deficit was closed mainly by cutting spending or mainly by raising taxes.

Alesina and Ardagna’s later work formalised this by studying ‘large fiscal adjustment’ episodes across OECD countries and sorting them into successful versus unsuccessful, and expansionary versus contractionary. The key finding was that the adjustments that succeeded in durably reducing debt, and the ones associated with expansion rather than contraction, were disproportionately those built mostly on spending cuts rather than tax increases. Looking at the underlying components, nearly every category of spending fell more in the successful episodes than in the unsuccessful ones, with public-sector employment growing especially slowly in the successful cases, and these differences held up at standard levels of statistical significance.

A companion paper by the same research group, comparing “expansionary” episodes (where growth picked up) to “contractionary” ones, found the pattern held even more starkly when you plotted total revenue and spending changes side by side: the visual contrast in the composition of expansionary versus contractionary episodes was described as striking even before running any formal test, and every component of aggregate demand tended to grow faster following the spending-based, expansionary type of adjustment.

This obviously raises the question: Why would the mix matter so much more than the total? The literature points to two complementary channels.

First, there is the confidence/expectations channel. For example, if a consolidation is credible with markets, firms, and households believing that the government is actually grappling with the deficit rather than merely postponing it then people expect lower future taxes and less risk of a debt crisis, interest rates, or currency instability.

That can raise private consumption and investment today, partially or fully offsetting the direct drag of the fiscal tightening. Spending cuts, especially cuts to entitlements, public payrolls and transfers, are read by markets as a more durable signal of fiscal seriousness than a tax hike, which can just as easily be reversed once the immediate pressure passes.

Second, there is the labour market channel. This turns out, in Alesina and Ardagna’s later work, to matter more than the confidence story. This mechanism runs through wage bargaining: a smaller public payroll and lower public-sector wages reduce a union’s ‘fallback’ position (the option value of not getting a private-sector job) which pushes down wage demands, raising private profits, investment, and competitiveness. Tax increases don’t offer any equivalent silver lining as they hit household income and firm profitability directly and immediately, with no analogous ‘improve my bargaining outside option’ side effect.

In other words, spending cuts, especially to the public payroll, can loosen up the labour market and hand a competitiveness gift to the private sector. Tax rises just take money out of the economy with no comparable offset.

However, you don’t need to buy the whole ‘expansionary austerity’ framework to accept the narrower point that tax increases are unusually damaging to growth. Christina Romer and David Romer’s widely cited study used a narrative method such as reading Presidential speeches, budget documents, and congressional reports to isolate tax changes made for reasons unrelated to the current state of the economy (closing a long-run deficit, say, rather than fighting a recession). They found that tax increases identified this way are highly contractionary, with effects that are strongly significant, robust, and considerably larger than estimates based on broader, less carefully isolated measures of tax changes. Subsequent estimates using related methods have put the exogenous tax multiplier at roughly 0.8 to 0.9 after one year and 1 to 1.5 after two years.

If you combine this with the spending-cut side of the ledger where the investment and labour-market channels discussed above can partially offset the direct demand hit, and you get the composition asymmetry. If you cut spending then the drag may be cushioned or even reversed whereas if you raise taxes then the drag tends to bite in full.

It should be noted at this point that the expansionary point is heavily contested and so we should not assume that simply bringing in spending cuts will boost economic growth. The most important lesson to draw from this is that if we are to have some form of fiscal consolidation then this should be in the form of spending cuts only NOT spending cuts AND tax rises.

So, what does this all mean for Britain and the upcoming Budget?

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As we have seen this past week, the bond market is very jittery. I’ve written about this many times before, but one of the reasons why the UK is in a more precarious position is because investors simply don’t believe that the government has the willingness or ability to reduce public spending and push through supply side reforms which will boost growth. Therefore, Healey and his team are right to point out that it needs to be a ‘tough Budget’. We do need some form of fiscal consolidation.

However, this should come through spending cuts only and not through a combination of spending cuts and tax rises. I intend to set out what this could look like in a later piece, but an obvious starting point would be reforms to Welfare, including for pensioners such as by abolishing the Triple Lock and raising the State Pension age. The government should also shrink the size of the Civil Service and reform the very generous system of public sector pensions.

This itself might help to boost growth but is probably unlikely to do so in isolation. As such, it should be accompanied by sweeping structural reform of the entire economy such as sorting out the tax system, slowing down on the push towards Net Zero, truly embracing free trade by eliminating tariffs and non-tariff barriers, and liberalising planning.

The take home message though needs to be: if we are to have ‘austerity’ then it should come through slashing public spending rather than through tax rises.

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Thanks as ever for reading. I’ll probably write something else this week. Enjoy the rest of your weekend.

Robert Jenrick has stated that if Reform UK wins the next General Election, it will increase the tax-free personal allowance to £15,000. While I appreciate his desire to allow working people to keep more of their hard earned money (especially if it is accompanied by spending cuts), this would be the wrong approach.

Rather than increasing the personal allowance, the government should lower it for a number of reasons.

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First, a large tax-free band is a poorly targeted subsidy. The personal allowance is often defended as help for low earners. However, while it is good to support poor people, it’s a flat allowance rather than a targeted transfer and so pretty much everybody gets it regardless of need. A policy that hands identical cash value to a warehouse worker and a corporate lawyer isn’t really a poverty-reduction tool

If the actual goal is protecting the lowest earners then means-tested transfers, in-work benefits, or a restructured Universal Credit taper do that job far more efficiently than a blanket allowance.

Second, it narrows the tax base and concentrates the burden on our most productive people. The UK already has one of the narrowest income tax bases among comparable economies: a large share of adults pay no income tax at all, while a relatively small number of higher earners contribute a very large share of total receipts. In fact, as pointed out by the Resolution Foundation this past week, effective tax rates remain below pre-financial-crisis levels for low and middle earners.

This concentration isn’t a stable foundation. It makes revenue unusually sensitive to the behaviour, migration, and mood of a thin slice of taxpayers, and it means each further increase in the allowance pushes an even larger share of the fiscal weight onto an even smaller group. In short, we are far too dependent upon this small group to pay our way (and it’s also why a wealth tax would be a terrible idea).

It’s not just an issue of precarity for the public finances, it’s also bad for growth. These high earners tend to be some of the most productive people in society and we are destroying their incentive to work hard and invest their money.

Lowering the allowance would broaden the base. It would mean that more people have some skin in the game and so rather than simply being beneficiaries of the State thanks to the largesse of wealthier and more productive people, they will have to make a contribution themselves. This would give them more of an incentive to ensure that taxpayers’ money is spent responsibly and would likely mean they would become more supportive of spending cuts.

Third, it would let marginal rates come down. A lower personal allowance raises revenue. If that revenue is recycled into lower basic and higher rates, or into raising the higher-rate threshold, the net effect for a middle-income earner could be broadly neutral on their tax bill while dramatically improving their marginal rate: the rate on their next pound earned. Moreover, given the well-documented ‘fiscal drag’ problem, trading a lower allowance for a wider basic-rate band and lower marginal rates is arguably a much better deal for middle earners than the status quo of allowance-plus-frozen-bands, which is what actually happens most years anyway.

Fourth, it would allow the government to cut far more damaging taxes (especially if it was part of a package of tax reform). Income Tax is certainly not ideal, but it is far less distortionary than other taxes such as Stamp Duty, Corporation Tax, and National Insurance Contributions.

Reducing the personal allowance would mean that some of these more damaging taxes could be lowered or even eliminated. While it would be difficult to argue that it would be progressive to do this in order to eliminate or lower many of these taxes, we should be more relaxed about this. What matters is not necessarily how ‘progressive’ the tax system is, but rather if it drives growth. Regardless, at the very least such a move should be used to reverse Rachel Reeves’ increase to Employers’ National Insurance in her first Budget.

Fifth, it would get the pain out of the way earlier. Income tends to be low early in a career (student jobs, early professional years) and rises with experience. A high personal allowance essentially defers taxation to later years without acknowledging that spreading a stable and moderate tax burden across a whole working life is smoother. This is true for both household budgeting and government revenue forecasting as opposed to exempting income early and taxing it heavily later, particularly once fiscal drag and higher-rate thresholds start to bite.

Sixth, and it’s related to the previous point, there’s also a public-finance credibility argument. This is because governments that build fiscal headroom by taxing broadly and moderately from the start are less likely to need sudden, disruptive tax rises later in the event of a crisis such as a major recession, pandemic, or war. Bringing forward a small, predictable amount of tax exposure is arguably kinder than deferring it into an unpredictable lump when households and the economy as a whole are at their most vulnerable.

Finally, it would align the UK closer to international norms. Many peer economies have income tax systems that kick in at lower thresholds than Britain’s, often paired with more extensive welfare transfers for the genuinely low-income. The UK’s approach of bundling poverty relief into a blanket tax allowance is something of an outlier. Decoupling ‘tax-free income for everyone’ from ‘support for people who need it’ would bring the UK’s structure closer to systems that many regard as more fiscally sustainable.

So, there we have it. Jenrick and Reform should be applauded for their desire to let working people keep more of the money they earn. They are also right to call for spending cuts. However, raising the personal allowance is the wrong approach and so shouldn’t be the priority for whoever forms the next government. Instead it should look at lowering the personal allowance so that the burden on our most productive people can be reduced and far more economically damaging taxes can be cut or abolished entirely.

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Other stuff

I’ve not posted here for a while due to travelling and other commitments. However, I have written stuff elsewhere. I wrote two pieces for the Great British Think Tank. The first was on why lots of the country’s low productivity growth can be explained by the high tax and regulatory burden on the financial services industry. The second was on why the government should abolish Inheritance Tax.

I also wrote a piece for Commenda Media. It’s on why non-tariff barriers are a real problem when it comes to international trade and what governments should do about it. You can read it here.

Thanks as ever for reading. Have a great weekend!

Yesterday Andy Burnham announced that he was going to improve high streets by making it harder for people to open betting and vape shops as well as those dodgy barber shops. His argument is that not many people really want them and, if we’re being completely honest, many of them are involved in tax evasion, money laundering, and other illicit activities.

It’s a popular policy and I do have some sympathy for it but I’m not 100 per cent sold on the idea. It’s easy to say ‘nobody asked for them’ but that probably isn’t entirely true. There clearly is at least some demand for the vape stores and betting shops. I would also argue that despite the many faults with vape shops, vaping is far less harmful for people than smoking cigarettes so they are doing some good. Moreover, while hanging out in a bookies is not really my scene, it does provide a social space for many people (not to mention the importance of the gambling industry to our economy and public finances).

Regardless, it is encouraging to see the Prime Minister try to improve our high streets. I’m fortunate enough to live just off Kensington High Street which is obviously lovely but atypical when it comes to high streets. I contrast it with the high street in Huddersfield which is grim and depressing in equal measure so something should be done.

However, Burnham is not being bold enough so below are five suggestions on other reforms he should implement if he really wants to improve our high streets.

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First, the planning system is a real problem (many such cases). Given the very restrictive planning system which is all too often gamed by NIMBYs, it is difficult to build anything or get permission for most types of venues. The vacuum is then eventually filled by these ‘undesirable’ stores. The government should liberalise the planning system so that it’s easier to build and to get permission for all types of businesses whether that be a pub, cafe, florists, shoe shop, book store, or even a vape shop.

Second, we need to end Business Rates relief for charity shops. I wrote about this for CapX two years ago and the argument still stands. Removing the subsidy for charity shops will create a level playing field for small businesses and the hospitality industry for the available space. This will no doubt cause many charity shops to close but this is no bad thing if it makes space for something more useful such as a data centre or a more productive business which adds variety and makes a high street more pleasant.

Third, the government should outlaw ‘chugging’. This is related to the second point but ‘chugging’ or ‘charity mugging’ is a nuisance. People should be free to walk down the high street without being harassed and harangued by someone in a fluorescent jacket attempting to guilt trip them into setting up a direct debit. It should also be noted that some of these chuggers do not represent actual charities and some are downright fraudulent. They are a nuisance and so banning them from high streets will not only make a small improvement to all our lives, the shops, bars, and restaurants on the high street will benefit from the increased foot fall.

Fourth, bring back the Vagrancy Act. It was bizarre that Starmer repealed it recently. I wrote about this for UnHerd the other month and you can read the article here. People are homeless for a number of reasons and many of them are fleeing domestic abuse or have issues with addiction and mental health. They deserve our care and compassion but allowing them to sleep on the street – especially in shop doorways – is neither caring nor compassionate to them or to the rest of society. They need to get help (and be forced to do so if necessary) and be moved away from our town centres. As for begging, this is often just one step below mugging and needs to be clamped down on. All of this will obviously require extra funding for mental health and addiction support as well as for the police and criminal justice system but it needs to be done if we want to improve our high streets.

Finally, the government should significantly lower the VAT registration threshold. Under the current system many firms constrain their own growth as they do not want to pay VAT (assuming they’re legit). This means they remain small and unproductive, they don’t innovate or expand, and they don’t hire more people. It also means that they have an unfair advantage over larger businesses.

Lowering the threshold will get the pain out of the way earlier so the barrier to growth will disappear, allowing productive businesses to thrive and make a positive contribution to our high streets and town centres. Many small businesses would collapse but again, this is no bad thing. It would free up the space and other resources to be used by better and more productive firms. It would also be a significant revenue raiser for HM Treasury, allowing it to cut much more damaging taxes faced by businesses – including those on the high street.

So, there we have it. The government should also obviously tackle high energy prices by abandoning the frantic rush towards Net Zero. It should also look into reforming the entire system of property taxes such as by scrapping Stamp Duty, Council Tax, and Business Rates (but that’s an article for another day).

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Other stuff

Yesterday I wrote an article for the Great British Think Tank. It’s on why the EU’s ban on beef from Brazil is pure protectionism and why the government should ignore the NFU and not introduce a similar ban in the UK. You can read it here.

Thanks as ever for reading. I’ll probably write something else this week. Stay cool and enjoy the eclipse!

On Monday, after several years of negotiations, the UK and Switzerland concluded a new enhanced Free Trade Agreement. It won’t dominate headlines the way the US or India deals did (the India FTA came into force last night).

However, it is the most significant services trade agreement Britain has ever signed and so it’s worth pausing on why that matters, both for the direct economic upside and for what it says about post-Brexit trade strategy more broadly.

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The deal is projected to add £5.2 billion a year to UK services exports to Switzerland in the long run, building on a relationship that’s already substantial: Switzerland is the UK’s sixth-largest services export market, with bilateral services trade exceeding £30 billion in 2025 and total two-way trade of roughly £53 billion. Foreign direct investment between the two countries stood at around £87 billion at the end of 2024, a reminder that this isn’t a fledgling trading relationship being built from scratch, but a deep one being deliberately deepened.

On the goods side (a smaller but not trivial part of the package) Swiss tariffs come down on UK lamb (tariff-free within quota for the first time), beef, dairy and English sparkling wine. This is actually a remarkable achievement. The Swiss are incredibly sound in many ways but when it comes to agriculture they are so protectionist that they make French and Canadian farmers look like champions of free trade. Whoever was responsible for negotiating the Agriculture Chapter on behalf of HM Government deserves a pay rise!

What makes this deal distinctive is its focus. Every previous UK trade agreement since Brexit (some of which I worked on)with Australia, New Zealand, the CPTPP bloc, India, South Korea, the Gulf Cooperation Council has been built primarily around goods, tariff schedules and market access for physical products. I’ve written about this before but this is often the reason why most new FTAs have limited impact on GDP.

This is the first one built around services from the ground up. Services account for roughly 81 per cent of UK economic output and 83 per cent of UK employment. A trade policy that spends most of its energy on goods deals is, in a very real sense, optimising for the smaller part of the economy.

The substance backs up the framing. UK professionals will get permanent, permit-free access to deliver services in Switzerland for up to 90 days a year, locking in an arrangement that was previously only temporary. There’s a new mutual recognition regime that makes it easier for architects, auditors, lawyers, and accountants qualified in one country to practise in the other. Intra-company transfer rules are eased for graduates moving into finance, insurance and consultancy roles. None of this generates a dramatic tariff-cut headline, but for an economy whose comparative advantage is expertise rather than manufacturing, this is exactly the kind of friction reduction that compounds over years into real export growth.

The most interesting argument for this deal isn’t really about Switzerland at all. Instead it’s about sequencing and specialisation. Inside the EU, UK trade policy was necessarily a lowest-common-denominator exercise: any agreement had to work for 27 economies with very different structures, sensitivities, and export profiles. A bespoke, services-first deal calibrated to the specific overlap between two service-heavy, high-skill economies is precisely the kind of agreement that’s hard to negotiate as part of a large bloc, because the interests of a manufacturing-heavy or agriculture-heavy member state would dilute it.

That’s the theoretical case for independent trade policy: not that the UK can necessarily out-negotiate the EU on scale (Switzerland’s own experience suggests smaller, agile economies punch above their weight through a network of narrow, sector-specific agreements rather than one giant treaty), but that it can tailor deals to its actual comparative advantage rather than an averaged one.

Switzerland itself is the case study for this approach (not an EU member, but ‘deeply integrated into the European single market via a network of bilateral treaties’, built one sector at a time over decades). The UK-Switzerland deal builds on exactly that model, layering on top of a 2023 wholesale financial services agreement and a 2025 professional qualifications recognition deal.

The deal teaches us three important lessons about trade policy in general.

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First, mutual recognition beats tariff-cutting for services. You can’t tariff a consulting engagement or a legal opinion the way you can tariff a car. The real barriers to services trade are regulatory (differing licensing regimes, work-permit rules, data protection standards). This deal’s substance is almost entirely about dismantling those non-tariff barriers, which is a template other services-heavy economies (and there are more of them every year) should study closely. This is the key. This is what we managed to achieve with the enhanced deal with Japan (CEPA) with a comprehensive Digital Chapter and some focus on services trade. Hopefully CPTPP will develop more in this way as well.

Second,depth matters more than breadth for high-value trading relationships. £53 billion in two-way trade with a country of under 9 million people outstrips many of the UK’s larger, more populous trading partners on a per-capita basis. Chasing large, headline-grabbing markets isn’t always where the marginal deal delivers the most value; sometimes it’s the smaller, wealthier, more structurally similar economy. Again, the deal with Japan is a useful illustration here. The negotiating team had mugs made with the branding: ‘CEPA goes deeper than EPA’. It was true. It did, and it matters.

Finally, trade deals compound. This agreement only makes sense as the latest layer in a decade-long relationship-building exercise with Switzerland, not a standalone event. Countries that treat trade policy as a portfolio built incrementally, rather than a series of unconnected wins, end up with agreements that reinforce each other (mobility rules that support professional-qualification recognition that supports financial-services access, and so on).

Again, this is key. Commentators and opposition politicians seemed to view our deals with Australia and New Zealand as the final word and so it was seen as a disaster that we might not have got everything we wanted. Brexit itself showed this wasn’t the case given that we negotiated enhanced deals with Japan and Canada while President Trump shows (less gloriously) that all trade deals can be renegotiated (or simply ripped up).

None of this transforms the UK’s growth trajectory overnight. £5.2 billion a year is real money, but it’s a rounding error against a roughly £2.5 trillion economy. The significance is more structural than numerical: it’s a demonstration that a services-led economy can negotiate services-led trade deals when it isn’t constrained by a bloc built around a different comparative advantage. It is a reminder that in trade policy, as in most things, playing to your strengths beats chasing headlines or photos in front of flags.

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Other stuff

Yesterday a report I co-authored for Policy Exchange was released. ‘How to Make Taxation Less Taxing’ highlights many of the problems with the UK’s tax system and how it should be reformed to reduce the burden on households and firms and help to drive growth. You can read it here. Lots of the policies will be expensive and so it should be viewed as a ‘sequel’ to an earlier Policy Exchange report which I co-authored with the same economists plus Iain Mansfield, which you can read here.

I also banged on about steel yet again. This time it was for the Great British Think Tank on why the government’s tariffs and effective nationalisation is expensive, economically damaging, and deeply unfair. Feel free to read it on the GBTT website.

Today I’m in CapX with an article about the tax report.

Thanks as ever for reading. I’ll probably write at least one more post this week. Enjoy the Football - it’s coming home!

Tonight England will (hopefully) thrash Norway in the World Cup. This is a blog about economics and public policy and making tenuous links so this post will be in that vein.

You often see people on the Left arguing that the UK should have been more like Norway and set up a sovereign wealth fund with the revenue generated from North Sea oil. In fact, I’ve already seen someone make that point on X (formally Twitter) in relation to the Football so I’m pleased I’m not the only one who manages to shoehorn their pet theory into whatever is in the news that day. Anyway, those making that argument are wrong for a number of reasons.

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Despite the similarities between Britain and Norway, they are, in many ways, very different. Norway is a country of around 5.5 million people. The UK has roughly 67 million. As such, that population gap alone means that even identical revenue streams would produce wildly different per-capita outcomes.

Furthermore, Norway did not start extracting oil at scale, nor start saving it, at the moment Britain most needed the money. Statoil (now Equinor) was established in 1972 and oil production ramped up through the 1970s and 80s, but the Government Pension Fund Global (the actual sovereign wealth vehicle) was not created until 1990, and it received no meaningful deposits until 1996. By that point Norway had already built a mature, well-functioning economy with low unemployment, sound public finances, and a political culture built around long-term consensus. Saving oil money was, for Norway, a matter of prudent surplus management by an already-stable state.

Britain’s experience with North Sea oil was completely different. Production began flowing in earnest just as the UK was living through the most severe fiscal and industrial crisis of its postwar history due to the economic mismanagement of successive governments: the 1976 IMF bailout, high inflation, mass unemployment, and a currency under sustained pressure.

When oil revenue started flowing in volume in the early 80s, it wasn’t arriving into a healthy economy with the luxury of wondering what to do with a surplus. Rather, it was landing in an economy haemorrhaging jobs in coal, steel, and manufacturing, with a government trying to simultaneously cut inflation, reform a bloated public sector, and keep unemployment benefit payments from bankrupting the country. Oil revenue wasn’t like a nice bonus but instead more like manna from Heaven. It was used to smooth an extraordinarily painful structural adjustment. It pretty much saved the economy and so it would have been incredibly reckless of the government to simply lock it away for decades.

Even setting aside timing, the raw scale of UK oil wealth relative to Norway’s is often wildly overstated. Because of the size of the UK population, and because the UK North Sea sector was structured very differently from Norway’s (split across a large number of private, often foreign-owned, operators on relatively short licences, rather than concentrated in a majority state-owned enterprise) the effective tax take per barrel was consistently lower in Britain.

For example, Norway taxed petroleum profits far more aggressively, with marginal rates on North Sea operators reaching into the 70–80 per cent range for extended periods, alongside direct state equity stakes in fields through the State’s Direct Financial Interest. Britain, by contrast, ran a comparatively investor-friendly fiscal regime designed to attract much needed private capital into a basin that, in many parts, was more expensive and riskier to develop than Norway’s larger and more geologically favourable fields.

The practical result is that even in absolute terms, and certainly per person, the pool of money genuinely available for a British sovereign fund was always going to be a fraction of Norway’s.

However, this does raise the question that even If It had been possible, should Britain have done It or should it do it now? The answer is no.

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First, the government is a poor capital allocator. A sovereign wealth fund is, at root, the State deciding to become one of the world’s largest shareholders rather than returning the money raised to the people who might allocate that capital more productively such as through consumption, saving, or investment. Even Norway’s fund, held up as the disciplined exception, has faced recurring political pressure to weight its holdings according to ethical screens, climate targets, and diplomatic considerations rather than pure return-maximisation.

Once a pool of capital that size exists under State control, it becomes a magnet for political interference lobbying for domestic ‘strategic’ investments, pressure to prop up national champions, or to punish geopolitical rivals. Given that successive governments had demonstrated that the British State with its profligate politicians and grasping trade unions struggle to manage ordinary spending discipline, it would have been deeply responsible to do this.

Second, opportunity cost is real and immediate. Every pound diverted into a State fund is a pound not used to cut distortionary taxes, pay down the National Debt, or remain in private hands to be spent, saved, or invested. Britain in the late 70s and early 80s had crushing marginal tax rates, a shrinking industrial base badly in need of new private investment, and a public sector borrowing requirement that was itself acting as a drag on the economy (not unlike today). Using oil revenue to fund tax cuts and reduce that borrowing requirement (which is broadly what happened) was the right thing to do, despite what the critics of today might say.

Finally, intergenerational equity doesn’t require state ownership of assets. An argument often made for a sovereign fund, and is one which I do have some sympathy for, is intergenerational fairness. Given that oil is a finite resource, revenue should be saved for future citizens rather than spent by the present generation.

However, this goal doesn’t actually require the State to hold a portfolio of global equities on the nation’s behalf. Paying down the National Debt achieves a similar transfer of value to future generations, by reducing the interest burden they would otherwise have to service, without requiring an enormous and permanent expansion of state-owned financial assets and the governance apparatus that comes with managing them.

Moreover, there is so much more the government should be doing to tackle intergenerational inequality. Liberalising the planning system so that young people can afford to own their own would be a good first step. Reforming the State Pension by raising the Age and scrapping the Triple Lock would also go a long way towards this as well.

So, there we have it. Britain is not like Norway when it comes to North Sea oil and even if it were, a sovereign wealth fund would have been a bad idea.

However, the UK should be much more like Norway when it comes to what to do with the actual oil itself. Norway unashamedly uses its oil to provide its citizens and firms with cheap energy (and sells some of it to Britain). The UK, on the other hand, has recklessly rushed towards a Net Zero target, leading to energy prices which have crippled industry and plunged people into poverty. Of course the UK should take climate change seriously and do what it reasonably can to reduce carbon emissions, but this should not come at the expense of economic growth and the country’s future prosperity. The new government needs to grant new oil and gas licenses and get drilling.

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Thanks as ever for reading. I don’t intend to be in a fit state to write anything tomorrow but will no doubt write a few things in the week. It’s coming home!

The government looks set to align more closely with Europe on the environment by introducing anti-deforestation rules modeled on those of the EU’s own regime. This would be a mistake.

Before we go on, it’s important to point out that obviously we should care about nature and the environment and that this is not an ‘everything the EU does is evil’ posts (I favour taking a pragmatic approach to dealing with our closest trading partner). However, following the EU’s example on this would not be in the UK’s best interests.

This is because, despite the importance of the two points discussed above, the optimal level of illegal deforestation is not zero. I wrote about this almost exactly two years ago in response to the government’s plan to introduce the well meaning but ridiculous ‘Martyn’s Law’.

We often hear people say things such as ‘If it saves just one life then it would have been worth it’. While I appreciate the sentiment this is obviously nonsense. We could spend an absolute fortune on policies which reduce harm and might save even more than one life, but I doubt anyone would say it was worth it. We don’t live our lives this way. Nobody likes the idea of car crashes, but nobody is seriously suggesting we lower the speed limit to 5MPH. Or, we could completely eliminate our Carbon emissions overnight, the issue would be to essentially stop doing anything and going to live in a shack on a commune in the woods. Unfortunately this is a surprisingly popular idea, but no rational person thinks it’s a good or workable idea. My point is: we accept trade offs and that we can’t eliminate or even internalise all of the negative externalities associated with economic growth and everyday life.

While incredibly worthy and well meaning, the plans to follow the EU on deforestation rules falls within this camp for five main reasons.

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First, it would place a very heavy burden on firms. For example, the EU’s own Deforestation Regulation (EUDR) requires that operators must submit high-precision geolocation coordinates linking products to specific plots of land, alongside evidence of legal, deforestation-free production, with manual spreadsheets unable to scale to the data standards required. Penalties for non-compliance can reach up to four per cent of EU turnover.

For large multinational food and consumer-goods firms with compliance departments and existing traceability systems, this is manageable, if expensive. For the small importers in the UK it is a different proposition entirely. It is revealing that even the EU has had to carve out simplified rules and one-off declarations specifically to stop smaller operators being crushed by the regime it designed.

Second, it is important to look at what the UK already does and how this differs from the EU’s approach. Britain targets illegal deforestation, whereas the EUDR requires products to comply with local laws and also be entirely deforestation-free, defined by reference to land use after December 2020. That distinction has real trade consequences. A deforestation-free standard effectively delists any producer (however law-abiding under their own country’s rules) who has converted land since the cut-off date. For commodity-exporting economies in Latin America, West Africa, and Southeast Asia, that can mean losing market access.

Given that many of these are low-income countries, it would impact some of the poorest people on the planet. The British government would effectively be denying them the opportunity to lift themselves out of subsistence and poverty and provide a better life for themselves and their families. It is why when I was working at DIT we had to battle well meaning amendments which would have required peasant farmers to meet the same standards as British and European Farmers – a worthy aim, but on which would destroy the livelihoods and prospects of those already in poverty.

Third, it would make it incredibly difficult for the UK to strike future trade deals or for the benefits of existing ones to be realised. We have already seen that it has taken the EU over a quarter of a century to strike a deal with Mercosur. Although this was mainly due to rent-seeking from French farmers (many such cases), stringent environmental requirements also held things up. Trade deals are already tricky enough to negotiate without adding even more clauses and chapters to them. I wrote just yesterday that Britain needs to double down on free trade. We need to be importing products from all over the world either by striking new deals or simply unilaterally relaxing our tariffs and regulations. Following the EU’s lead will just make this harder.

Fourth, it risks incurring the ire of the USA. Britain is, of course, a sovereign nation and so we should do what we think is best even and not be dictated to by other countries. However, the government also needs to live in the real world. The US has already expressed its annoyance with the EU over this as the USTR has (rightly) started to identify regulations and other non-tariff measures as the biggest barrier to trade. America has a mercurial President who is easily aggrieved and needs no excuse to slap tariffs on those who he believes have wronged the US. Following the EU’s example could see British businesses facing higher tariffs or denied access to the American market. Not an ideal start to Andy Burnham’s Premiership.

Finally, it will ultimately be ordinary British people who suffer. As discussed above, the requirements would increase costs for firms. These will be passed on in some form, most likely through higher prices. At a time when people are already struggling with a high cost of living, this would simply exacerbate their misery. It could also lead to job losses, fewer opportunities, and lower wages – it would be the young and the low-skilled who would suffer the most. It would also deprive consumers of the greater choice of products and services which would be afforded to them through free trade.

In an ideal world we would have no deforestation. We’d also have no pollution, nobody would ever die in a car crash, and the NHS would have an infinite pot of money to spend on medications and treatments to keep us healthy and happy forever. Unfortunately, we have to live in the real world and so the optimal level of deforestation is not zero. This is not to say that we should not take deforestation seriously. We should work closely with like-minded partners such as the EU to tackle this and use the Aid Budget to work with farmers in developing countries to improve their agricultural techniques and increase standards. Deforestation is a worthy aim, but it should not come at any cost.

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Thanks as ever for reading. I’ll probably write something else tomorrow. Enjoy the football and stay cool!

I’ve just finished reading the excellent How To Win A Trade War by Soumaya Keynes and Chad Bown. I will be writing a full review of it at some point but I think one of the best chapters in the whole book is the one on trade deficits. Keynes and Bown are absolutely right to point out that while they sometimes can be problematic, they often aren’t. I’ve been planning on writing about this for a while so here is my take on it.

Advanced economies such as Britain and the US do tend to worry about the trade deficit. Especially in terms of goods. They see it as a sign of industrial or even national decline. And, in the case of Trump’s America, of being cheated by the rest of the world. In reality, the trade deficit is not a sign of decline. It’s closer to a side effect of being a country which the rest of the world most wants to invest in. Rather than something to panic about, it can actually be a sign of a relatively healthy economy.

I’ve written about this before but there is this idea in politics that trade is a zero-sum game with winners and losers where exports count as a positive point and imports a negative. In the UK’s negotiations with Australia and New Zealand, for example, much of the commentary was around how we had been ‘beaten’ because we opened up our markets (especially in agriculture) more than the other side and so we had lost. Leaving aside the fact that Australia and New Zealand were already very open in terms of agriculture, it reveals a fundamental (and very old-fashioned) understanding of trade.

Imports are a win. They lower prices for consumers and give them greater choice. They force domestic firms to up their game and become more productive. There will be some losers such as firms who refuse to adapt, but they make most of our lives better. When I worked for Truss I tried to set up an ‘Importing is GREAT Britain’ campaign to make this case but sadly it never took off. Thankfully Adam Smith made the case more eloquently than I ever could 250 years ago.

Our politicians and much of the media treat the trade balance like a scoreboard between countries instead of what it actually is: an accounting identity that mechanically reflects how much a country saves versus how much it invests. If you actually run the numbers, and the ‘we’re losing’ narrative collapses almost immediately for both Britain and America.

Let’s start with the US. America. has run a trade deficit nearly every year since 1976. If the doom-mongers were right, that’s 50 years of continuous economic self-destruction. Instead, America spent that half-century becoming the largest, most dynamic, most innovative economy on the planet, home to the companies the rest of the world envies and the capital markets the rest of the world depends on.

I wrote about this year but the link between currencies and trade is vitally important here. The Dollar is the world’s reserve currency. Central banks, sovereign wealth funds, pension systems, and ordinary savers around the world want dollar-denominated assets (Treasury bonds, US equities, American real estate etc) because the US has the deepest, most liquid, most trusted capital markets in human history. To buy those assets, foreigners need dollars. The main way the world acquires dollars is by selling goods to the US. The trade deficit is, in large part, simply the flip side of the rest of the world’s appetite for American assets.

This confers an exorbitant privilege on the US. It has the ability to borrow cheaply in its own currency from a world eager to lend it money. Try running this experiment in reverse: imagine if America forcibly balanced its trade tomorrow. That would mean choking off the foreign capital inflows that fund American businesses, keep Treasury borrowing costs low, and finance the federal government far more cheaply than it could otherwise. President Trump and Peter Navarro should be careful what they wish for.

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Let’s focus on Britain. The UK runs a goods trade deficit (it imports more cars, machinery, food, and oil than it exports. That’s the number that gets waved around as though it’s an issue which urgently needs to be fixed. You see this across the political spectrum, including from organisations I respect.

However, Britain consistently runs a substantial surplus in services trade such as financial services, insurance, legal services, consulting, and creative industries that the rest of the world buys from London at scale. The City remains one of the most important financial centres on Earth, and that status generates enormous invisible exports that never show up on the evening news but absolutely show up in the balance of payments. Britain effectively sells the world expertise and trust; the world sells Britain physical goods. Measured the way mercantilists measure things (bags of gold) that looks bad. Measured the way a modern, services-dominated economy should be measured, it’s a sign Britain still punches well above its weight in exactly the sectors of the future: finance, professional services, and intellectual capital.

Moreover, like America (and despite all its current problems), Britain attracts substantial foreign investment such as into the property market, firms, and our gilts. This is because investors still see Britain as a stable, rule-of-law jurisdiction with deep capital markets and a lot of potential. That capital has to come from somewhere, and the trade deficit is, again, part of how it gets there.

The Trumps of this world and the mercantilists among our own political and media class cry out that other countries are beating us. No they’re not! The countries most often cited as trade ‘winners’ such as China, Germany, and Japan run large persistent surpluses, and the case can be made this reflects a weakness, not a strength: chronically weak domestic demand, ageing populations reluctant to spend, and businesses that would rather export their savings than invest them at home in better wages or infrastructure. Germany has been quietly hammered by its own central bank, the EU, and by the IMF for exactly this as it is running a surplus so large it amounts to under-investment in its own economy.

If running a surplus made a country an economic winner, Germany and Japan would have been growing faster than America for decades. They haven’t. The US economy has outgrown both for most of the past thirty years, deficit and all.

We do need to discuss the loss of manufacturing jobs. While it is true that some communities really were hurt, and pretending otherwise insults the people who lived through it. Specific regions exposed to import competition (parts of the American Rust Belt and certain British manufacturing towns) experienced real, sustained job losses that didn’t simply get absorbed by new opportunities elsewhere.

However, the trade deficit barely deserves the blame it gets for this. The single biggest force hollowing out manufacturing employment in both countries over the past forty years has been automation and productivity growth, not imports. American factories produce vastly more output today with a fraction of the workforce they once needed and that’s true even adjusting for trade. In the case of Britain we should also be pointing the finger at the reckless and frantic push towards Net Zero which has raised energy prices and crippled industry.

The deficit didn’t cause the disruption; it’s one symptom of a much larger structural shift that was happening anyway. Tariffs aimed at ‘fixing’ the trade balance, in both countries, have a long track record of raising consumer prices and provoking retaliation against exporters while doing almost nothing to bring back the specific jobs people are nostalgic for.

However, we shouldn’t be complacent here. A serious in-balance in trade can cause issues, especially if the country is facing other issues. What is more, Britain is in danger of its services surplus being eroded in the coming years and decades. We have a tax system which punishes hard work, investment, and other productive activity. We have a planning system which makes it expensive to build enough of the stuff we need including homes, offices, labs, data centres, and energy and transport infrastructure. We have burdensome taxes and regulations targeting the Jewel in the Crown of our economy: the financial services sector. Finally, we have an unstable political environment with profligate politicians determined to borrow more while we’re in the midst of a global bond glut which risks spooking the markets.

All this is to say that rather than blaming the trade deficit, we should actually do something. Provide targeted support and opportunities for people in ‘left behind’ areas who have lost out from trade. We also need to liberalise the planning system, cut red tape, and slash public spending so that we can start lowering taxes. We should then double down on free trade by striking more deals with other countries and pursuing free trade in food.

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Other stuff

I’ve written a few opinion pieces over the past two weeks. I wrote two for the Great British Think Tank: the first was on why an ‘exit tax’ would be a terrible idea and the second was on the parlous state of the public finances.

I also wrote a piece for CapX on why Burnham’s ‘Buy British’ plan is fraught with danger. I wrote an article for Conservative Home on why those on the centre-right should support the OBR. Finally, I wrote a short piece for UnHerd on why repealing the Vagrancy Act was a bad move. You can read it here.

Thanks as ever for reading. I might write something else this week. Stay cool.

Before I ‘enjoyed’ watching England play Ghana in the World Cup the other night, I watched Uzbekistan play Portugal. I’ve been ‘long’ on Uzbekistan since last September when I met some of their representatives at the WTO and they were very kind to chat to me about their accession proceedings and also treat me to Uzbek food (seriously delicious). It’s a country I knew very little about prior to then but I have since done a bit of reading about the country and I find it fascinating. Below I set out why I’m optimistic about the country’s prospects and why this shows that the WTO is a force for good in the world.

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Despite being a landlocked country wedged between some of the world’s most challenging neighbours, the country is transforming its economy with the ambition of joining the WTO. It’s on track to meet its deadline and the impact has been impressive.

To appreciate how far Uzbekistan has come, you need to understand where it started. Under Islam Karimov, who ruled the country from independence in 1991 until his death in 2016, Uzbekistan was among the world’s most closed economies. Currency controls were in place, foreign exchange was rationed, and the state maintained an iron grip over vast swathes of agriculture and industry. The cotton sector was effectively a system of state-enforced labour, rightly drawing international condemnation and trade sanctions.

The accession of President Shavkat Mirziyoyev changed the trajectory almost immediately. Since 2017, Uzbekistan has embarked on one of the more ambitious reform programmes in the post-Soviet space (liberalising the currency, slashing red tape, opening up to foreign investment, and beginning the long, painstaking process of reducing the role of state-owned enterprises). The WTO accession process, begun formally in 1994 but pursued with new urgency since 2017, has become the organising framework for this transformation.

The numbers are genuinely impressive. In 2025, Uzbekistan recorded its strongest economic performance on record, with GDP expanding by 7.7 per cent. For the first time, GDP exceeded $145 billion. This follows growth of 6.5 per cent in 2024, when the economy reached $115 billion and foreign investments surged 1.6 times to $34.9 billion.

These are not the numbers of a country muddling through. They are the numbers of an economy with genuine structural momentum. In 2025, construction output, services, and exports all grew significantly This was driven by agriculture, the textile industry, energy, and raw material processing. Real household incomes increased by 9.2 per cent, while the current account deficit narrowed. Inflation, long an issue for developing economies in transition, is being tamed. Inflation slowed to 7.3 per cent in 2025, taking it to one of the lowest levels in the past nine years.

For context: this is an economy growing at roughly the pace of India, but hardly anybody is talking about it. The question is not whether Uzbekistan is growing. It clearly is. The question is whether that growth can be sustained, broadened, and deepened. That is precisely what WTO accession is designed to help achieve

Uzbekistan applied for WTO membership all the way back in 1994, but spent two decades in a kind of institutional limbo given that it was an economic basket case and the fact that most countries are thankfully not a fan of slavery.

The recent push has been of a different character entirely. Deputy Prime Minister Khodjaev has been explicit that for Uzbekistan, the WTO accession process is not merely a technical exercise but a powerful catalyst for the broader domestic reforms underway. That framing matters. It signals that the country is using the external discipline of WTO negotiations to drive internal change. This is a proven strategy that worked for China, Vietnam, and others before it.

The pace of reform legislation has been striking. Since May 2024 alone, Uzbekistan has enacted 192 legal acts to comply with WTO standards. In April 2025, President Mirziyoyev signed Decree No. 74 (a comprehensive reform plan aimed at modernising the economy, liberalising markets, and preparing for WTO accession) covering everything from technical regulation to competition policy and energy sector reform.

In October 2025, the EU and Uzbekistan concluded their bilateral negotiations on market access for both goods and services (a significant milestone in the accession process). The EU, which accounts for roughly 10 per cent of Uzbekistan’s trade, described the deal as underscoring its political support for both WTO membership and Uzbekistan’s underlying reform process. Uzbekistan has reaffirmed its commitment to completing accession by the time of the 14th WTO Ministerial Conference next year.

Reforms undertaken in preparation for accession have included the elimination of export-contingent subsidies and exclusive rights for state-owned enterprises in sectors such as gas, electricity, and metals, as well as the liberalisation of price controls. These are not cosmetic changes. They go to the structural architecture of how the economy actually functions.

The sectors with genuine potential are diverse, which is itself a source of strength.

Agriculture and food exports are already demonstrating what liberalisation can achieve. Agricultural exports, led by fruits and vegetables, reached $2.17 billion in 2024 ) a 22.4 per cent increase), driven by a 32.5 per cent surge in fruit and vegetable sales. Uzbekistan has the climate, the land, and the labour force to become a serious food exporter to the Middle East, Europe, and beyond. WTO membership would lock in market access and give exporters the legal certainty they need to invest in supply chains and cold storage infrastructure.

Mining and resources are another obvious strength. The country holds significant reserves of gold, copper, uranium, zinc, and natural gas. Chemical exports totalled $1.68 billion in 2024, with a 29.1 per cent rise, including an 83 per cent jump in inorganic substances. Energy exports are also climbing. These commodities attract foreign capital, and with WTO-consistent rules governing investment protection and dispute resolution, the sector is likely to draw considerably more.

Textiles represent a particularly interesting case. Uzbekistan is one of the world’s largest cotton producers, and the government has invested heavily in moving up the value chain from raw fibre to yarn, fabric, and finished garments. Progress has been uneven, and the sector underperformed its investment targets in 2024, but the underlying logic is sound. If Uzbekistan can replicate even a fraction of Bangladesh’s or Vietnam’s journey up the textile value chain, the employment and export dividends would be enormous.

Demography is perhaps the most underappreciated asset. The population increased by nearly 700,000 people in 2025 alone, surpassing 38 million, further expanding the domestic consumer market. Uzbekistan is a young country, with a median age well below the regional average. That means a growing labour force, rising domestic consumption, and a potential human capital dividend in the decades ahead.

However, Uzbekistan does face a lot of challenges.

Landlocked geography is perhaps the most immovable constraint. Uzbekistan shares borders with five countries and is one of only two doubly landlocked nations in the world, meaning every route to the sea requires crossing at least two international borders. Landlocked geography creates logistical trade diversification hurdles, and a raw-materials-focused export base heightens commodity price risk. Until regional infrastructure improves getting goods to market remains expensive and complex.

Dependence on Russia and China is a vulnerability. Uzbekistan’s heavy reliance on trade and remittances from Russia exposes it to considerable risks. Economic downturns in Russia, which accounts for around 11 per cent of GDP threaten Uzbekistan’s stability, and geopolitical tensions worsen these vulnerabilities. The country has navigated the aftermath of Russia’s invasion of Ukraine with more dexterity than many expected, but the underlying exposure remains.

Inflation and structural energy reform are ongoing challenges. Energy prices have been kept artificially low for decades, and bringing them toward market levels (as WTO accession effectively requires) creates transitional pain. Inflation in services surged to 21.8 per cent in 2024 following an increase in administered prices for electricity and natural gas. Managing this transition without squeezing households too hard is no easy task.

State-owned enterprise reform remains a work in progress. Privatisation has been promised and has begun, but the pace has been uneven, and vested interests around legacy SOEs are substantial. The WTO Working Party has specifically flagged progress on privatisation and competition policy as areas requiring continued attention. Rules on paper do not automatically translate into competitive markets in practice.

Institutional capacity needs to mature alongside the legislative reforms. Investors need not just good laws but confidence that those laws will be applied consistently and fairly. Uzbekistan’s rankings on rule-of-law and business environment indices have improved, but they remain well below what would be needed to attract the most demanding categories of foreign direct investment.

Finally, and perhaps most importantly, the Uzbek people are still not free. Even if the country might become more economically free, political freedom is still pretty non-existent. It is an authoritarian state with political repression and no real opposition. This needs to change before the country is embraced too warmly by the West.

So, there we have it. I’m long on Uzbekistan because it’s already made a lot of changes. I think it also highlights the fact that despite all its issues, the WTO remains a force for good in the world. In a manner similar to the EU, countries want to join it. However, membership comes at a cost and countries which want to join have to reform. They have to liberalise their economies, stop wasting taxpayers’ money on subsidies, and open their markets to trade. Doing so has improved their economies and lifted their people out of lives of subsistence and squalor. They live longer, healthier, happier lives and their children get a good education as a result.

This obviously doesn’t work perfectly in every country. China, for example, while it has made significant reforms and has become rich, still cheats. It abuses the global trading system with high tariffs, subsidies, and intellectual property theft. The less said about Russia the better.

I might write something in the future about China’s accession process (it’s fascinating) but for the most part, when countries have decided they want to join the global trading system, they make positive reforms.

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Other stuff

It was overshadowed by Sir Keir Starmer’s resignation but Alan Greenspan died on Monday. I wrote a short piece for City AM on what his career can teach policy makers today. You can read it here.

Thanks as ever for reading! I might write something else this week if I don’t melt or burst into flames.

About this time last year I tweeted that Rachel Reeves would be pressured to changing her fiscal rules and adopt a Public Sector Net Worth (PSNW) target. Thankfully, she had more sense and didn’t do this in the end.Now, It looks almost certain that Andy Burnham will be the next Prime Minister. Whoever his next Chancellor is will likely succumb to pressure and adopt a PSNW target.

This would be a mistake.

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PSNW is, in essence, an attempt to draw up a balance sheet for the British State. The Office for National Statistics and the Office for Budget Responsibility define it as the broadest balance-sheet aggregate available under current statistical frameworks: the value of everything the public sector owns, financial and non-financial, minus everything it owes.

That makes it different from the measure most people associate with ‘the national debt’. Public Sector Net Debt (PSND) only nets a narrow set of liquid financial assets against gross debt. PSNFL, which became one of the government’s two formal fiscal targets from January 2025, goes a little further, also counting illiquid financial assets such as the student loan book and a wider range of financial liabilities. PSNW goes further still: it adds in the estimated value of physical, non-financial assets such as roads, hospitals, schools, military hardware, government buildings, and land.

On paper, this sounds like progress. A debt measure alone cannot distinguish between a government that borrows to fund a wasteful subsidy and one that borrows to build a hospital that will deliver decades of public value. Both add identically to PSND. A net worth measure, in theory, would show the hospital as an asset roughly offsetting the new liability, while the wasteful subsidy would simply make the country poorer. That asymmetry is the entire intellectual case for PSNW, and it is not a silly one. The trouble is what happens once you try to put it into practice as the rule that decides how much a Chancellor is allowed to borrow.

A fiscal rule exists to answer one practical question: how much can the government safely borrow without endangering its ability to service that debt? Net debt and net financial liabilities are reasonably good proxies for this, because the assets they net off (cash reserves, gilts held by the state, loan books) can, in principle, be sold or drawn down to meet financing needs.

Physical infrastructure cannot. Ben Zaranko (formerly of the IFS) has pointed out that the government cannot sell the strategic road network or the NHS estate to meet a gilt redemption, and in the rare cases where it could sell such assets, it would typically be because a private buyer intends to start charging the public for something that was previously free (turning a motorway into a toll road, for instance). An improvement in PSNW driven by a revaluation of the road network tells you nothing about whether the Debt Management Office will be able to sell enough gilts next quarter. Treating it as a green light to borrow more conflates wealth on paper with cash in hand.

This is not a hypothetical concern. Between 2021 and 2023, one statistical measure of UK PSNW improved significantly (driven almost entirely by rising interest rates pushing down the market value of the government’s own gilt liabilities and reducing the present value of public sector pension promises). Read naively, that would have suggested room for a substantial debt-fuelled fiscal expansion, at precisely the moment borrowing costs were spiking and the Bank of England was offloading bonds into an already strained gilt market. A target that says ‘borrow more’ exactly when underlying conditions say ‘borrow less’ is not a safeguard. It is, in the immortal words of Admiral Ackbar, a trap!

A second problem compounds the first: there is no single, agreed way to calculate PSNW, and the choices involved are not minor technicalities (they can move the headline figure by tens of percentage points of GDP). The ONS itself publishes two different versions, one consistent with European statistical standards and one with IMF standards, which disagree on whether to include unfunded public sector pension liabilities and on whether to value government debt at face value or market value. The OBR uses yet another convention for its own forecasts. Each choice sends a different signal about how much ‘headroom’ exists.

Non-financial assets compound the problem further. Statistical convention generally requires roads, hospitals and government buildings to be valued at ‘replacement cost’ (what it would cost to rebuild them today) rather than at any measure of the economic or social value they generate. A rise in construction costs or land prices mechanically inflates PSNW, even though it makes the government’s actual fiscal position worse, not better, because future infrastructure investment will now cost more to deliver. A government chasing a net worth target could end up cheering exactly the kind of cost inflation that ought to alarm it.

And because changes in pension liability valuations depend heavily on the discount rate chosen, relatively small adjustments to actuarial methodology can be the difference between a government meeting or missing its target, for reasons entirely unconnected to anything it has actually done. A fiscal rule that can be satisfied or breached by an actuary’s spreadsheet, rather than by a Chancellor’s decisions, is not a serious constraint on policy.

Even the most comprehensive version of PSNW leaves out the government’s single largest asset and single largest liability. The asset is the state’s power to tax current and future citizens. The liability is its implicit promise to fund the NHS, the State Pension, schools and defence for generations not yet born. Neither shows up on any balance sheet, however broadly drawn, which is precisely why the OBR’s long-term fiscal sustainability projections remain the more informative tool for judging whether Britain’s public finances are actually sustainable. A target built on PSNW risks giving policymakers false comfort: a balance sheet that looks healthy today tells you almost nothing about whether the next forty years of demographic change and rising health costs are affordable.

Proponents sometimes point to New Zealand as proof that balance-sheet management works. It is worth looking at what New Zealand actually does. The Public Finance Act 1989 does include net worth among its fiscal principles, instructing the government to build a buffer in total net worth against future shocks.

However, New Zealand’s binding operational target is a conventional debt ceiling (a commitment to bring net core Crown debt below 40% of GDP) not a net worth figure. Moreover, New Zealand’s own Treasury data illustrate exactly the IFS’s warning about volatility: in the 2023/24 fiscal year, an operating deficit was almost entirely masked in the net worth figure by revaluation gains on physical assets, including an upward revaluation of the state highway network, leaving net worth broadly unchanged even as the government ran a real cash shortfall. In 2024/25, net worth fell even though the headline operating position improved, because of a one-off increase in veterans’ disability entitlements.

These are not signs of a measure that reliably tracks the government’s underlying capacity to borrow; they are signs of a measure that bounces around for reasons unconnected to the day-to-day stance of fiscal policy. This is exactly why even New Zealand still anchors its real fiscal discipline to a debt ratio.

The IMF’s own 2018 Fiscal Monitor, which did more than any other document to popularise balance-sheet thinking in public finance, made the same point: net worth measures are a valuable supplementary lens, not a substitute for monitoring debt, debt service and financing needs.

This is, in fact, more or less the conclusion the UK has already reached after several years of genuine debate. Rachel Reeves explored taking ‘greater account’ of public sector assets but stopped well short of a net worth target. Reeves essentially went for PSNFL even despite pressure to go for a PSNW target.

That is a sensible middle ground: it captures some of the genuine unfairness of penalising governments for buying a financial asset of equal value to the debt incurred, without resting national fiscal credibility on the replacement cost of the road network or the latest pension discount rate.

None of this means net worth thinking is worthless. Considering both sides of the balance sheet is a useful discipline when governments contemplate nationalisations or asset sales — the 2010s sale of the student loan book at a price the Public Accounts Committee later judged poor value is a textbook example of a decision driven by a narrow desire to cut headline debt, which would have looked far less attractive judged against net worth.

However, there is a wide gulf between using net worth as one input among several and targeting it as the rule that determines how much a Chancellor may borrow.

The reckless version of this idea is one in which a government, eager to expand borrowing for political reasons, seizes on a flattering net worth reading and treats it as licence for a large, debt-fuelled expansion of spending, even as actual debt-servicing costs and gilt issuance volumes are climbing to historic highs. Markets price government debt on the basis of the state’s demonstrated capacity to raise tax revenue and control deficits, not on a replacement-cost estimate of the motorway network. A fiscal framework that confuses the two would not free Britain from austerity; it would simply move the moment of reckoning further down the road, to be paid, with interest, by a future Chancellor as the bond vigilantes and the IMF come knocking.

Ultimately, the government needs to get over its addiction to borrowing and start to live within its means. I’ve banged on about this before but we need a much smaller State where the government does a few things really well and leaves the rest to the private sector. This will involve massive spending cuts so that taxes can eventually be cut in a responsible way, productivity increases, and the economy grows. Rather than trying to figure out how it can borrow even more money via accounting trickery, the next Chancellor should focus on slashing spending.

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Thanks as ever for reading. I might write something else this week depending on events and the World Cup.

Working on trade negotiations can often feel similar to having lived through the Blitz or survived a natural disaster. Perhaps this is why officials and politicians are so keen to pop open a bottle of something fizzy and alcoholic and pose for photographs in front of flags as soon as things are wrapped up.

However, while the pleasantries are still under way, the lawyers descend in order to perform the legal scrub. Their mission: to translate the agreement into every official language of the signatory parties and ensure perfect legal equivalence across all versions. Months pass. In the case of the EU, this can take years.

While the principle of going through the legal scrub and translation process is fair and reasonable in theory, it is probably time for the EU to scrap it.

Certain words and terms can carry completely different meanings in different languages and cultures. This is why you don’t just stick the Dead Sea Scrolls or the Odyssey into Chat-GPT and hope for the best. It’s for this reason that trade deals, even after they have been negotiated, can take so long to come into force as trade lawyers argue over what exactly is meant by ‘level paying field’ or ‘sausage’.

The EU needs to embrace ambiguity. It is not a bug but a feature of trade negotiations. While officials would probably not say it publicly, trade deals are concluded because both sides believe the agreed text supports their interpretation. A clause on digital services may mean one thing to Brussels and another to London or Washington. Both parties sign because they can live with the text as they read it. The agreement comes into force. Trade increases. We all become richer. Disputes, if they arise, get sorted at some point down the line.

Insisting on a translation into every language before ratification means relitigating issues already agreed by officials and their political masters. There are significant costs associated with this.

Trade deals between the EU and other countries and blocs can run to thousands of pages. Ensuring authentic equivalence across multiple languages requires armies of specialist legal-linguists, extended timelines, and the sustained attention of negotiating teams who might otherwise be implementing the agreement or starting the next one. It’s bad for the EU, its Member States, and its trade partners.

The EU – and France in particular – might be understandably squeamish about this, but it is time for them to recognise that the Lingua Franca is English. Many bilateral investment treaties and a growing number of trade instruments designate English as the single authoritative language and provide translations provided for accessibility but carrying no legal weight. This is the approach of much commercial arbitration.

European nations are at risk of being left behind the US and Asia given their tendency to favour regulation over innovation. They cannot afford to squander the benefits of free trade by waiting years to implement Free Trade Agreements.

Trade deals can bring enormous economic benefits but are ultimately political instruments. Their genius often lies in what they leave unsaid. It’s time for the EU to embrace ambiguity and the English language.

Other stuff

I realise that I haven’t written here since May 29th!

I was pleased to write a piece for Great British Think Tank the other week. They’re new but are doing good work so do check them out and you can read why I think the government’s industrial strategy is a mistake.

I also wrote for CapX for the first time in about 18 months. It combined three of my interests: football; free trade; and making tenuous links. You can read it here.

I was also in City AM as part of their Shadow MPC where I explained why the Bank of England should not increase interest rates. Feel free to read it here.

Thanks as ever for reading. I might write something tomorrow if I don’t die from heat exhaustion but there is a chance that nobody would read it given that for some reason people will sadly be more interested in the Prime Minister.

The Chancellor has announced a list of food products which she intends to abolish tariffs on over the summer. It’s part of her Summer Holiday Savings plan dreamt up by her team at HM Treasury in an attempt to reduce the cost of living for families/keep her in gainful employment come autumn. While some of the plans announced such as the VAT cut leave much to be desired, Rachel Reeves should be commended for the cuts to tariffs.

However, lots of my fellow travellers on the centre-right have questioned why on earth Britain has tariffs on goods such as bananas in the first place. It’s a good question and I fully agree with the sentiment behind it. What’s more, the reason(s) why we do have them is fascinating (IMHO) and can teach us a lot about trade policy.

The most frequently cited reason for why governments levy tariffs on goods is to protect their domestic industries. Producers don’t like competition and most politicians don’t like confrontation and they definitely don’t like negative headlines about how they’ve sold out their farmers and so they ignore the economics and bring in protectionist measures and so everyone is happy for a while (apart from consumers and industries with less powerful lobby groups). This clearly isn’t the case with bananas (and lots of other fruit and veg) as Britain doesn’t grow them,

So, what’s the deal?

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The main reason the UK has tariffs on bananas etc is strategic. We don’t produce them but other countries do and they tend to be very important to those countries as well. As such, they are seen as bargaining chips which can be traded away in negotiations (‘We’ll drop our banana tariffs if you abolish tariffs on our beef’). So, they’re there to increase Britain’s bargaining power in current and future trade negotiations.

The UK is currently considering working towards a trade deal with Mercosur. It should definitely do this and take less time than the EU (this shouldn’t be difficult given that it took over a quarter of a century). In the negotiations Britain will be under pressure to open its market to all that lovely Argentine beef (steak lovers, rejoice) and other agricultural products. The rent-seekers at the NFU will no doubt kick up a massive fuss over this and so the government will feel pressured to not liberalise in this area and so there is a danger of the negotiations stalling. Moreover, the UK will be pushing for greater access in services and for the countries in the Mercosur bloc to liberalise in terms of digital trade. This is another potential sticking point. I wrote the other month about why Trump and the USTR are (surprisingly) correct when it comes to digital trade and the need to take a more liberal approach with fewer protections for domestic industries.

Brazil is one of the key players in Mercosur and one of the main opponents of liberalisation in digital trade. This is where bananas come in. Brazil is also a massive exporter of bananas and is keen to get its producers greater access to British consumers. So, we will likely see a situation where the UK gets concessions out of the Mercosur nations in exchange for lowering/abolishing its tariffs on bananas and increasing or abolishing its quotas.

Second (and it’s related to the first point), we still have tariffs on bananas and similar such fruits as a result of Brexit. Working on the design and implementation of the UK Global Tariff (UKGT) was pretty good fun (despite the incessant lobbying from Big Margarine) and we got rid of nuisance tariffs (those under two per cent), made them all whole numbers, and listing them in Sterling as opposed to Euros.

However, it was also a complex process. I’ll probably write a separate piece on designing the UKGT at some point but we had to strike a balance between making intermediate goods cheaper in order to boost the competitiveness of UK exports without spooking the EU, protect domestic industries, minimise disruption, make negotiations with the EU over Rules of Origin less problematic, take the Northern Ireland issue seriously, and help in trade negotiations.

On the latter point, bananas are again relevant here. You might not think of the EU as a banana producer but it is because of the Canary Islands. As such, we kept tariffs on bananas and other fruits and veg (we did some interesting stuff with tariffs on oranges, although that’s a story for another blog post) in order to put pressure on the EU via Spanish, Italian, and French farmers to get a deal.

Finally, we have tariffs on bananas because we’re worried about the potential impact on farmers in developing nations. Take Ghana, for example. As part of the UK’s membership of the EU it already had a deal in place with Ghana (and lots of other countries). All of these needed to be rolled-over. Some of them were relatively simple procedures and so the critics were kind of right to call them ‘copy and paste jobs’ but many did have to be re-negotiated and some countries saw it as an opportunity to try and get more concessions out of the UK as they knew that we faced political and media pressure to get deals signed.

Surprisingly, Ghana was one such country. Well, I say ‘Ghana’, but it was actually Nigeria. Essentially, Ghana wanted a liberalisation on Rules of Origin requirements which would allow goods shipped from Ghana (but were essentially Nigerian) to be classed as ‘Ghanaian’ for trade purposes and enter the UK market tariff free. Given that Ghana is very poor, the UK is more than happy to take a very liberal approach to low-value goods from the country to come in tariff free. Nigeria, on the other hand, is very much not poor and is on the up, the UK government felt that this was very cheeky and so the negotiations stalled. There was a very real possibility that there would have been a shortage of bananas or that the price might have spiked if this had happened – in fact there were scare stories in the UK press at the time that this might happen with sources from a certain West African country being cited.

Eventually everything was resolved. However, the UK government is cognizant of the potential impact of liberalising trade in bananas on farmers in Ghana. It is concerned that if it permanently abolished tariffs on bananas then Ghanaian producers would be out-competed by their counterparts in countries such as Brazil.

So, there we have it. Having tariffs on bananas might seem, well, bananas. However, unlike many of the things the UK government does, there are actually some logical reasons for it.

Although the reasons for tariffs on bananas and other fruit and veg might be reasonable, it does not mean they are right. The Chancellor should be applauded for the temporary tariff cut to certain food products but she should go even further. Rachel Reeves should commit to permanently abolishing tariffs on all agricultural products.

I wrote a blog post on this a while ago and so I won’t repeat myself here. The argument is the same in that it will reduce costs for consumers, provide a boost to firms in other industries, and make UK agriculture even more productive. In my earlier piece I did not reference the potential impact on producers in less economically developed nations such as Ghana and that was an oversight on my part. The obvious solution is for the UK to use the money it spends on development to help these countries to actually develop. Spend the money helping Ghanaian farmers to become more productive and for the entire country to move up the value chain.

Although there are some logical and well meaning reasons why we have such tariffs, it is still bananas that we have tariffs on bananas (and nuts that we have tariffs on nuts). The Chancellor is right to temporarily abolish tariffs on some foods not produced in the UK in order to ease the cost of living. Rachel Reeves (or whoever replaces her) should go further and abolish all agricultural tariffs and quotas and pursue free trade in food with the whole world.

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Thanks as ever for reading. I might write something else over the weekend.