Start listening

Two years ago Boris Johnson won a thumping majority at a general election which produced the Conservatives’ best result since 1987. It has since been anything but plain sailing. Whilst Covid has changed both the political and economic landscape, the government has made a series of unforced errors which has called its authority into question. Effective leadership in the UK has been conspicuous by its absence of late and the issues are now beginning to cut through with the electorate. The Conservatives’ heavy defeat at the North Shropshire by-election, which until this week had returned a Tory MP to Westminster at every plebiscite since 1832, is an indication that all is not well.

It is ironic that the by-election did not need to happen at all – it was only triggered by the resignation of Owen Paterson who, if he had accepted the 30-day suspension imposed by the parliamentary Standards Committee, would still be an MP. The fact that the government tried to bend the rules to keep Paterson in place has opened up a whole can of worms, with last month’s corruption stories being supplanted by a media furore over parties in Downing Street last Christmas in breach of the social distancing regulations in place at the time. This comes on the back of the Dominic Cummings affair, when one of the PM’s senior advisers was able to flout lockdown rules. It is not just the actions of politicians which are causing the public to be restive. The police refusal to investigate the issues are straining the electorate’s credulity and patience, especially when people faced criminal charges for holding gatherings at the same time as the Downing Street event took place (this video sums up the popular view).

A government in trouble but let's not get carried away

Although the double-digit vaccine-driven Tory lead in the opinion polls at mid-year had narrowed somewhat, even in early-October they enjoyed a comfortable six point lead. This has evaporated very quickly with Labour now enjoying a six point lead. Although we should be wary of reading too much into mid-term opinion polls – all governments experience a sharp drop in support at some point – the speed of the collapse has set alarm bells ringing in government. So long as Johnson was perceived to be a political asset, his party was willing to turn a blind eye to his shortcomings. But Johnson’s public approval ratings are flagging. If press reports are to be believed, dissatisfaction with Johnson’s style of leadership is mounting in Westminster and challengers are jockeying for position in the event that a leadership contest is called in 2022. But don’t hold your breath.

For all the excitable commentary suggesting that the prime minister is in big trouble we should not allow ourselves to get too carried away. For one thing, experience suggests that prime ministers can hang on for quite some time after MPs begin to question their leadership. This was true for Theresa May and perhaps even more so for Margaret Thatcher, whose authority leached away over a prolonged period. This is perhaps even more relevant to today’s situation since she, like Johnson, was the personification of the government. My guess is that Johnson is unlikely is to be going anywhere anytime soon. A second problem is that the Tories do not have anyone with the star quality to fill Johnson’s shoes, despite the claims being made for the Chancellor Rishi Sunak. In addition, there is also a risk that the electorate may start to weary of a party that has developed an unfortunate habit of ditching its leaders – both of his predecessors either jumped or were pushed – particularly one with Johnson’s brand recognition.

Is Johnson a cause or a symptom?

In any case, there is an argument that Johnson is merely a symptom, rather than the cause, of the political malaise. Perhaps it is his party rather than just the prime minister which is increasingly out of tune with the electorate. As former Conservative minister Chris Patten recently suggested in a radio interview, “I’m not sure that this is a Conservative government. I think this is a sort of all over the place, rather chaotic English nationalist government.”

Having recently reread John Major’s autobiography I was struck by many of the parallels between the situation facing the current Conservative government and the travails of Major’s government between 1992 and 1997. Back in the 1990s, Major was undermined at almost every turn by a determined coterie of Eurosceptics which gave rise to a situation in which, to use the words of former Chancellor Norman Lamont, “we give the impression of being in office but not in power.” Although dissident Conservative MPs believed they were tapping into the well of public opinion, in reality their  obsession with anti-EU ideology was out of proportion to its importance to the general public and they paid the price at the ballot box in 1997.

The situation today is not quite the same. After all, in the last five years the Eurosceptics appear to have won their “war” with the EU but only at great cost to the institutional fabric. But they seem unable to accept the economic consequences of their actions and continue to lash out at the EU rather than coming to an accommodation as the public appears to want. The government often seems helpless in the face of Covid. Large numbers of MPs increasingly have a problem with lockdown measures to try and halt the spread of the disease, citing the primacy of personal freedom over the strictures of what one MP called the “public health socialist state.” Indeed, in a parliamentary vote earlier this week, 99 Conservative MPs voted against legislation making it a requirement to wear masks in indoor venues and it was only passed thanks to the support of the opposition. This flies in the face of evidence suggesting that the public is in favour of measures to combat the spread of the Omicron variant.

At a time when most people are trying to get on with their lives in the face of Covid, they do not have time to care about political machinations. But when they are regularly assailed with stories of failure to apply the rules consistently, they start to become restive. One of the principles of a modern democracy is that no one is above the law. Everyone has to abide by the same rules and the sheer volume of evidence to the contrary was one of the reasons for the North Shropshire result.

It may be that this is merely a short-term issue that will eventually blow over. Perhaps if the pandemic recedes in 2022 much of the anger felt today will dissipate. This makes it even more important that the government properly handles the latest wave of the pandemic. Tory MPs may object to a lockdown but public opinion suggests that there is not the same degree of opposition. As it is, large parts of the hospitality sector are already complaining that pre-Christmas trade has collapsed. The government may be forced to resurrect the furlough scheme in some form in order to provide a backstop for those whose incomes are being hit. Without some form of financial support, the Red Wall seats which the Conservatives won in 2019 may revert back to Labour. Either way, it is time for the government to start listening to those in whose name they govern, for the public do not like what they are currently seeing and hearing.

The Covid curse strikes again

If 2020 was the year from hell, 2021 is turning out to be more like purgatory – a temporary version of hell which we hope will end sometime but don’t know when. As the end of 2021 moves into view, it is beginning to feel very much like a year ago: After a summer during which infection rates fell, a new Covid variant has popped up and case numbers are sharply on the rise as we head into winter. The surge in case numbers is especially big in Europe (perhaps less the case in the UK where case numbers have been elevated for the past three months) and the discovery of the Omicron strain has raised a lot more questions than the scientific community currently has answers. New restrictions on social gatherings are being put in place and forecasters are beginning to edge down their economic growth projections for the winter months, which is bad news for those institutions that have already produced their year-ahead outlooks and spent the past few weeks marketing them to clients.

Global case numbers suggesting there have so far been 268 million Covid infections can be taken with a huge grain of salt, especially when they indicate that China has reported less than 100,000 positive cases versus 10.6 million in the UK – a country with a population just 5% of the size. European data are likely to be more accurate given the rigorous testing procedures in place across the continent: they point to almost 86 million cases since February 2020 with a quadrupling in the last 12 months.

Germany has led the way in tightening restrictions, with significant curbs on the unvaccinated who will have to contend with curtailed access to restaurants, cinemas, leisure facilities and many shops. This was described by outgoing Chancellor Angela Merkel an act of “national solidarity.” The new Chancellor Olaf Scholz backs a policy of mandatory vaccinations, although this has yet to go through parliament. Indeed, it is notable that the proportion of the German population vaccinated against Covid currently stands at a relatively low 71%, versus 75% in the UK; 77% in France and Italy and 82% in Spain. In response to the threat posed by Omicron, the British government earlier this week implemented what it called ‘Plan B’, carefully avoiding the word lockdown. This entails reintroduction of working from home guidance; the use of facemasks in “most public indoor venues” and a requirement to show a Covid pass in a number of venues, depending on the number of people present and whether it takes place indoors or outdoors.

The Covid policy tracker, published by the Blavatnik School of Government at Oxford University, shows that the restrictions index jumped sharply in Germany and is now back to levels last seen in January (chart). Such a sharp jump has not yet been seen in the UK, although it is likely to edge up over the next few days as the Plan B measures take full effect. A comparison of the political response in the UK and Germany shows considerable differences in approach. Germany has acted quickly and the political consensus is in favour of action to restrict the spread of Covid. But there is mounting political resistance in the UK to further restrictions, driven in part by the defiant libertarian streak which is present in the governing Conservative Party. The Plan B legislation may indeed only pass through parliament thanks to the political opposition which has said it will support the measures.

This is not to say that there are not legitimate concerns about the damage that lockdowns do to the economy. Of course, we do not yet know what the full impact of the Omicron variant will be but the evidence suggests that it is the most transmissible variant to date. Case numbers look set to rise sharply across Europe and the government responses are unlikely to leave the economy unscathed. Even before the latest concerns about the Omicron variant, the UK economy had lost considerable momentum. GDP in October rose by just 0.1% m/m taking the annualised 3-month growth rate down to 3.2%. Ironically, such growth as there was in October came from output in human health activities, which grew by 3.5% m/m due mainly to a continued rise in face-to-face appointments at GP surgeries. It is a pretty strange sort of economy where growth is being driven by numbers of sick people going to see their doctor. It is still possible that output will get back to pre-Covid levels by Q1 2022, as the BoE projected in November, although this will depend on the extent of any anti-Covid measures.

Omicron has muddied the likely monetary policy response ahead of the BoE’s final MPC meeting of the year on Thursday. After considerable criticism that the BoE had led analysts up the garden path by not raising interest rates last month, it was widely believed that it would do so in December. That expectation has faded and rates are tipped to remain on hold next week. Given the uncertainty surrounding the economic situation, that would seem to be a prudent move. The consensus GDP growth projection for 2022 has slipped from 5.6% in August to 5.1% last month and the likelihood is that it will dip further (for the record, my own projection looks for a growth rate in the range 4% to 4.5%). There are many who believe that high inflation warrants monetary tightening. However this is to miss the cause of the recent inflation spike which is the result of supply chain difficulties. Tighter monetary policy today will do nothing to tackle this problem although once some of the Covid-related uncertainty passes there is a case for modest policy tightening.

Markets appear to be taking the view that the Omicron variant will slow economic activity rates and thus cool some of the inflationary pressures. That is not what happened a year ago when the emergence of the Delta variant made these problems worse rather than better. This is a reminder that one of the bigger dangers we face is complacency. The Omicron variant represents a new strain rather than a new disease, so the threat is perceived to be lower than it was in March 2020. That may be true but it may turn out to be wrong if the transmissibility rate is so much higher and the virus mutates yet again. Public health experts are thus warning that we once again need to deploy the toolbox developed in 2020, which entails significant economic disruption.

Quite how long we can go on doing this depends on the duration of the Covid pandemic. Based on the evidence derived from this paper, the average duration of global pandemics over history is around 6 years. It is not an edifying thought that we are barely two years into the Covid outbreak.

Go north or don't go at all

The recent news that the UK government has cancelled the extension of its planned high speed rail line (HS2) to cities in the north of England should not really surprise anyone. Expanding what is essentially nineteenth century technology at great expense in the twenty first century was always a controversial policy option. Naturally there was a political angle to this and called into question the government’s commitment to levelling up regional inequalities. But whilst the UK clearly does suffer from significant regional inequality issues, a bigger question is whether investment in railways is a good way to address them.

A historical perspective on British railways

The railway network has been at the centre of the political debate on transport for decades. In the wake of WW2 the government nationalised the dilapidated network as a prelude to a significant investment programme to phase out steam. In the 1960s, the (in)famous Beeching Report advocated slashing the network to eliminate the least profitable lines in the face of rising competition from road transport. This was duly acted upon and the UK rail network today is less than half the length of 60 years ago (incidentally, the cuts did nothing to restore the network to profitability). The UK is not alone, of course, in slashing its rail network: The track length in Germany, France and Italy is currently between 60% and 70% of its historical peak. Arguably, however, the UK went too far.

I have long believed that the Beeching approach to managing the rail network was a huge forecasting mistake since it assumed that then-current trends would continue indefinitely (before anyone wants to talk about the shortcomings of economic forecasting I should point out that Beeching was a physicist not an economist). To illustrate the folly of extrapolation, by 2019 the annual number of UK railway passenger journeys had surged to its highest level since 1923, representing a figure almost three times the modern-day low recorded in 1982 (chart 1). Anyone who regularly travelled by train prior to March 2020 will be aware of the extent to which trains were frequently overcrowded. On an international comparative basis the UK rail network is the most intensely used in Europe. Although the total number of passengers carried on German railways in 2019 was 60% higher than that of the UK, the German network is more than twice the size. On a passenger miles per km basis the UK figure is 78% higher (chart 2).

Assessing the pros and cons of extending the network

The consensus of academic opinion is that railways contribute considerable benefits to the economy’s productive potential, including alleviating congestion on the road network and facilitating the development of clusters of economic activity. They also cut CO₂ emissions and reduce the number of casualties on the transport network relative to what would happen were the journeys to be made by road. Congestion reduces the efficiency of the network which has an associated economic cost and there are studies which attempt to put a price on it (see this study, which looks at London). Whilst we can be sceptical of the exact numbers, inefficient networks undoubtedly have an impact at the margin by adversely affecting productivity and business location decisions.

When making the case for HS2 it is therefore important to assess the costs of the investment against the benefits. To get a handle on the financial costs, it was initially suggested in 2010 that to build a high-speed line between the cities of London and Birmingham (a distance of 215 km) would cost around £20bn. More than a decade on, and after considerable political and economic wrangling, the cost of this phase is estimated to have doubled to around £45bn. It was further proposed to extend the network northwards in two phases: one running a further 114km north-west to Manchester and the other an additional 190km towards Leeds (this is the part that has been shelved). Costs have spiralled accordingly. 

The previous estimate put the cost of building the network at £55.7bn: the latest official estimate is a cost between £72bn and £98bn. Even after allowing for inflation, that represents an increase of up to 60%. The cost-benefit ratio has already halved to around 1.2 - a figure that classifies the project as low value for money on the Treasury's classification scale - implying that a 20% rise in costs will make this a marginal project at best. The benefits of HS2 are dominated by time savings. Around half of the transport benefits (and over 40% of the total network benefits) are derived from time savings. It is expected that HS2 will cut the journey time between London and Birmingham from 81 to around 52 minutes when (if) the line opens between 2029 and 2033 (as projected) and reduce the London to Manchester journey time from 127 to 67 minutes. In the view of many laypeople, these are relatively small time savings compared to the costs.

The respected transport economist Stephen Glaister, who I first heard dismiss the economics of HS2 in a lecture almost a decade ago, recently wrote a report which sounded a sceptical note. He wrote that “it will inevitably be a financial loss-making enterprise, with the taxpayer filling the funding gap, with those resources having to forgo alternative uses.” That is not necessarily a reason for not undertaking the investment but he further noted that “an appraisal of the likely effects of the Covid-19 pandemic on the demands for travel and hence on the finances or economic benefits of the scheme has not been published.” In addition, he was a lot more cautious regarding the assumptions on carbon emissions than the project’s proponents. Glaister also referenced the 2006 Eddington Transport Study which concluded that economic returns from high-speed rail in the UK are unlikely to be as large as for investment in some alternative projects. In Glaister’s words, “in England, unlike in some parts of the European mainland or China, the revenue and other benefits of high speed are limited because the major cities are relatively close to one another and … there has been strong competition from established, medium speed and high frequency railways.”

With the costs of the first stage of the project having spiralled, it is hardly surprising that the government has suddenly got cold feet about further extending HS2. It is equally unsurprising that political leaders in the north feel that they have been short-changed by a government that promised not to ignore the provinces. Indeed, if the government had been serious about levelling up in the first place, it should have followed the recommendation of the National Infrastructure Commission which suggested that connectivity between the northern cities was a higher priority than HS2.

High-speed can work - the Italian example

It is sometimes hard to escape the view that British politicians want a high-speed network because other countries have successfully introduced them and the French TGV system is often cited as a model for Britain to copy. But Italy provides a better role model where last month Alitalia ceased flight operations after years of financial underperformance, driven in large part by the fact that its domestic business was being undercut by the rail network. According to a 2019 report by Trenitalia, passenger numbers on its high-speed trains soared from 6.5 million in 2008 to 40 million in 2018. On the lucrative route between Rome and Milan, 69% of those travelling between the two cities went by train whilst the share of those travelling by air fell from 26% in 2015 to below 20% in 2018.

The distance between Rome and Milan is 570km which means that a fast train can compete with air travel. This is double the distance between London and Birmingham which nobody in their right mind would ever want to fly. However, London to Edinburgh is a distance of 650km where a fast rail service would be competitive vis-à-vis flying. Whilst time savings will be derived on the first half of the journey to Manchester, these are insufficient to do in the UK what was achieved in Italy. The key takeaway in my view is that building a long distance high-speed network that can compete with air travel, thus leading to a reduction in carbon emissions, would have positive social benefits. However, there are better ways to spend £98bn than a relatively short stretch of high-speed rail that looks increasingly like a vanity project. These funds could provide up to 150 new hospitals, for example, or be invested in green electricity options. The message is thus extend north, or not at all.