Europe after Trump

I participated in a European foundation workshop last week, which examined the impact of a Trump presidency on Europe. While European leaders politely congratulated Trump and emphasised long-standing links, the policy community is less sanguine.

As you might expect, there was a lot of emphasis on the need for Europe to be less dependent on the USA. However, other strains of thought saw developments within Europe, making it more challenging to develop a coherent European response. When Trump was last in power, he faced a reasonably united Europe led by centrist moderates. Today, Europe has its own populist leaders who have a deep-seated scepticism of the EU and a desire to erode it from within. Many of these leaders also welcome Trump's return, although wary of his policies, particularly trade tariffs and the consequent dumping of China's overproduction on Europe. Add to that the political uncertainty in France and Germany, and Europe looks anything but united.

Despite Brexit, the EU remains Britain’s biggest trading partner, representing about 40% of UK exports. However, the US is the UK’s largest trading partner as an individual country, accounting for about a fifth of all exports and worth more than £190 billion a year. If it's an either/or, re-establishing ties with the EU is in Britain’s financial interest. Neither option is good news for the Chancellor's growth strategy.

My presentation was on the implications for defence. A Trump presidency means Europe and NATO must get serious about their defence. European defence policy has traditionally been heavily reliant on US support, without it NATO will be diminished, While there are some traditional Republican policy voices in his cabinet picks, we also have Pete Hegseth running the Pentagon and Tulsi Gabbard at national intelligence. Having a Putin apologist within the Five Eyes intelligence alliance is a frightening prospect, particularly for Ukraine, which could lose funding and the vital intelligence assets, mainly high-end satellites, that are essential to its defence.

The following two months could be critical for Ukraine as Russia intensifies its offensives to strengthen its bargaining position. Biden's missile decision helps Ukraine, but it's not a silver bullet. Trump's buffer zone plan is doomed to failure, as the UN peacekeepers in Lebanon would tell you. Putin will simply use the time to regroup before his next aggression. Front-line European countries identified this more than others at the workshop.

The silver lining is that it could galvanise the UK and the EU enough to take action on UK-EU security and defence cooperation. Germany, in particular, needs to develop a new defence policy with funding to match, ending reliance on the USA for protection and supporting Ukraine. To date, the average German military support for Ukraine represents approximately 0.1% of Germany's GDP annually. According to projections by the Kiel Institute, ceasing support for Ukraine could lead to costs ranging from 1% to 2% of annual GDP over the next five years.

Britain also needs a new defence strategy to end the myth that we can do everything. The British Army cannot deploy a whole division for combat. The Royal Air Force struggles to defend its airfields, especially against missile attacks, and the Royal Navy lacks enough crew for its remaining ships. In a sustained Ukraine-style conflict, our ammunition supplies would quickly run out. We should not forget that the so-called independent nuclear deterrent almost entirely relies on US technology. These were highlighted in a House of Commons Defence Committee report, and the new UK Government is developing a new strategic defence review. 

Since the Second World War, Britain has acted as a supporting player to the US, pursuing global goals without the means to sustain them. The last government's 'tilt to the Pacific' and 'Global Britain' rhetoric was just the latest iteration of this delusion. As Frank Ledwig put it recently, "The UK must decide: is it a global power or a regional force in the Euro-Atlantic area? It cannot be both."

Autumn Budget 2024

 I am sadly old enough to remember when budget purdah was a thing. Clearly, no more, with relatively few surprises in today's budget, which hadn't either been formally announced or at least briefed in advance. That doesn't mean it wasn't a massive shift in direction, arguably transformational. I would highlight three in particular.

The first is the distributional analysis. After 14 years of the Tories rewarding the rich, this looks like a proper socialist budget. This point is reinforced by specific measures such as changes in Capital Gains Tax, Inheritance Tax, and, the one I particularly enjoyed, private jet passenger duty.

Second, there will be a big increase in spending for devolved administrations. An extra £1.5bn for the Scottish Parliament this year and an increase of £3.4bn next year. As Stephen Boyd points out, this doesn't end all the Scottish Government's long-term challenges, but if I were Shona Robison, I would sleep better tonight. 

Third are the fiscal rule changes, which many of us have been shouting about for weeks. This means more significant public investment in rebuilding our public services. As the OBR highlights, this alone won't boost GDP in the medium term, but it does start to fix the foundations of the economy after many years of neglect. Some of us would argue it could have been more significant and, as the OBR also highlights, must be sustained. The historical record shows (below) that it is not the 1960s and 70s, but greater than the manifesto implied and a move in the right direction. The OBR assessment of the impact on inflation, debt, and the bank rate is marginal. 

Other excellent announcements include the above-inflation increase in the minimum wage and reserved spending on defence, although this is still below where we need to be as a proportion of GDP. Hopefully, the Defence Review will address the huge threats to our national security. Confirming the ending of VAT exemptions for private schools thankfully showed the absurd lobbying failed. I was also pleased to see action on the mineworkers' pension scheme. 

If there is one big disappointment, it is the failure to increase fuel duty. I filled up my car on the way home yesterday, and when I left the petrol station, I thought it would not likely be that low for some time. However, Fuel Duty was frozen, and the 'temporary' 5p cut was kept. For a government that cares about climate change, this is bonkers, particularly when increasing the cap on bus fares. Some economic downsides around household incomes and employment have to be acknowledged. Increasing Employer NICs is not a free lunch.

Overall, I was very impressed with this budget. Of course, there are actions I would have liked to see that are missing, and she could have gone further with others. Serious tax reform is still needed, particularly on wealth. However, this was a step change in direction, and you can't do everything at once. There is still some headroom against fiscal rules, so there is scope for further structural changes.

Great Britain? How We Get Our Future Back

 If you are interested in economic policy, I recommend reading Torsten Bell’s new book, Great Britain? How We Get Our Future Back. In it, he provides a detailed analysis of the key economic challenges facing the UK today and proposes policies to return the country to economic and social prosperity. Torsten Bell is best known as the chief executive of the Resolution Foundation, whose economic and social policy analysis is always worth reading. Before that, he was a Treasury civil servant and now a Labour MP.

His analysis of what's gone wrong is trenchant and well-argued but not new to anyone who follows the Resolution Foundation's work. He argues that the austerity economics pursued by the Tories was economically damaging and socially disastrous. A toxic combination of high inequality and low growth left the UK exposed to Brexit, a global pandemic and the biggest inflation shock for a generation. In particular, this negatively impacted both poorer and middle-class Britain. He also highlights the breakdown of the intergenerational contract, ‘The young are earning lower wages than their predecessors, in more insecure jobs, while renting smaller properties for longer, as their aspirations to homeownership sail out of view.’

Bell points to a productivity gap that has doubled in the UK compared to France and Germany despite the well-publicised challenges those countries face. British workers produce in five days what their competitors produce in four, resulting in stagnant real average wages. Rising property prices and rents mean the average family spends twice as much of their income on housing costs compared to 1980. The cost of housing in the UK is the second highest out of 38 OECD countries. 

For the degrowthers (the theory that growth is undesirable), they’ve got what they wanted. Anyone thinking the problem is that we have had too much growth has missed the news that we haven’t had any. This is not normal, even after recessions.

There is much more about what's wrong, but the vital part of the book is how to put it right. I suspect not all his views will be universally accepted. For example, he opposes a Universal Basic Income (UBI), arguing, ‘an affordable UBI would be inadequate, and an adequate UBI would be unaffordable.' I agree, but many on the left don't. He is not opposed to directly elected mayors (I am) but argues that they have been tasked with providing economic leadership without the means to deliver it. He is absolutely right about the need to build up a smaller number of larger pension funds, but that is being resisted, including by many councils in Scotland.

The core of his prescription is investment, public and private. Britain has had some of the lowest investment spending of countries in the OECD; consequently, we have substandard water systems, transport, and road infrastructure. He argues that Britain should adopt a 'golden rule' level of investment of 2.5%- 3% of GDP every year, pointing to the opportunities for investment in the necessary decarbonisation of the economy.

None of this is exactly radical economic thinking, but has the Chancellor read his book?  The signs are mixed. Some reports indicate a possible change to the fiscal rules, and others say the Chancellor is demanding cuts to infrastructure spending of around 10%. There has been some more positive news today. The Chief Secretary to the Treasury, Darren Jones, has announced a 10-year infrastructure strategy at the full spending review next year, which includes housing and schools as key economic growth drivers and will be overseen by a new body. But note, that is ‘next year’. 

And don’t expect the private sector to come to the rescue. Non-government investment in almost every other G7 economy is in a narrow range from 16.8 to 18.7 per cent of GDP, but in the UK, it's not even 15 per cent. Foreign ownership has increased from just over 10 per cent in 1990 to over 55 per cent in 2020, with no pressure to make long-term investment decisions. Bell points to the evidence that worker representation on company boards boosts investment levels and productivity. A policy that even Tories from Macmillan to May have supported – so let's do it!

Returns from higher investment in the form of increased productivity and growing real wages will take some time to realise - outwith the political cycle. However, short-term cuts could damage the economy and Labour’s electoral credibility. It may be early in the UK administration, but Scottish Labour has an election next year.

Bell concludes, ‘We must reclaim the confidence that progress is possible… it is politically and economically possible for the UK to escape from its union of slow growth and high inequality.’ Knock, knock – let’s hope the Chancellor is reading this book.

New Local Democracy for Scotland

I was in Edinburgh today, speaking at the launch of the New Local Democracy for Scotland Declaration.

Building a Local Scotland is a group of academics, trade unionists, former council leaders, and journalists who have launched a campaign to tackle the creeping centralisation that has left Scotland as one of the least locally governed countries in the world. You can read more on our website: https://buildlocal.scot.

In my contribution today, I argue that while the Scottish Parliament has brought democracy closer to Scotland, it hasn’t created the promised local democracy for our communities. Instead, we still have some of the largest basic council units in the world, and public services have been centralised.

Despite initiatives between COSLA and the Scottish Government, several commissions and numerous reports, we are no closer to achieving the principle of subsidiarity. In practice, powers have been stripped from councils and services such as police, fire, further education, and water have been centralised. Three-quarters of public spending is directed by Scottish Ministers, including around £23 billion spent by unelected quangos.

I have been involved with most of those initiatives. The Commission on Strengthening Local Democracy (2014) is a good starting point for understanding why local democracy matters. I was an expert advisor to the Christie Commission, which recommended, ‘A first key objective of reform should be to ensure that our public services are built around people and communities.’

The Jimmy Reid Foundation has published several reports on this issue. In Building Stronger Communities (2020), I argued that the starting point is subsidiarity, building integrated public services from the bottom up and sharing where appropriate. The role of central government should be to set the strategic direction based on outcomes – rather than trying to direct services from Edinburgh. In a paper published last week, Building the Local Economy, we highlight the impact of centralisation on the local economy.

However, a country the size of Scotland cannot justify duplication and difference for its own sake. Therefore, we need public service frameworks that allow local services to focus on what matters to achieve positive outcomes. Even where decentralisation is not viable, services should still be required to cooperate locally more effectively than currently. 

It sometimes feels that the only discussion around local government comes from those advocating directly elected mayors or provosts. These top-down initiatives have yet to produce a strong sense of local empowerment. Instead, they centralise power in a single individual, which could lead to unaccountable, authoritarian leadership.

There will be trade union and workforce concerns over creating a larger number of councils and other public bodies, along with cost concerns over duplication. This is where national frameworks are essential. Local decision-making should be focused on what’s important to communities, such as service design that reflects local needs. We do not need a hundred-plus procedures, different terms and conditions, contract documents, etc. Neither do we need a bureaucratic infrastructure of senior managers. This is an opportunity to explore the concept of a single public service worker on standard terms and conditions with joint introductory training for all jobs – both envisioned by the Christie Commission.

In an era dominated by austerity economics, local services continue to face the brunt of budget cuts. Successive administrations have ducked the reform of local government finance despite credible proposals in the Burt Report (2006) and The Commission on Local Tax Reform (2015). The Council Tax accounts for less than 20% of council expenditure. In European countries, the equivalent councils have between 50% and 60% of income raised locally. Local election turnout is generally significantly higher in countries with greater devolved taxation. Smaller councils on the European model also enable local people to engage with local democracy. The many initiatives to improve citizen engagement and participatory practices in Scotland have failed to engage working people because they haven’t put real power in the hands of recognisable communities. 

I view the Declaration as a starting point for a new conversation about genuine local democracy in Scotland and how we deliver public services. We must put right the forgotten aim of devolution - to disperse power not just from Westminster to Holyrood but onwards to communities. A comprehensive reform plan built up from communities not imposed from the centre. If you agree, please sign the declaration.

Defence Review

 The new Labour Secretary of State for Defence has announced a defence review. This is not just a routine action for new governments, but a crucial and urgent step given the changes in threats since the last review. The review, with its broad and unsurprising parameters such as NATO, nuclear deterrent, Ukraine, etc., is of utmost importance. The final report is due in the first half of 2025. 

I was recently asked to prepare a briefing for a European client looking at changes in defence policy across the continent. Most of our allies are also reviewing their defence strategies. The most apparent change in threat level relates to the Russian invasion of Ukraine. July's NATO summit showed the extent to which Russia's recent aggression in Ukraine and its transition to a war economy have completely transformed NATO's focus.

The Defence Review should refocus UK defence policy away from Boris Johnson's 'Global Britain' to Europe and the need to ensure our convention forces have the equipment and the supplies to fight a war in Europe. That doesn't mean abandoning the delivery of the AUKUS partnership with the US and Australia or ignoring the Gulf and the Middle East. However, we need to focus on the immediate threats to UK security. This Chatham House paper is a good assessment of Russia's challenges in upgrading each of the main armed services.

This highlights the need to increase defence spending. The Labour Party's Manifesto committed the Government to “set out the path to spending 2.5 per cent of GDP on defence.” That will be addressed in the Autumn Budget Statement. Given the Chancellor's talk about 'black holes' in the budget, which is unhelpful and inaccurate in my view, immediate progress along this path may be challenging. She has already delayed expensive infrastructure projects - a well-travelled Treasury route to balance the books. The IFS ripped into the previous Government's 'smoke and mirrors' on defence spending. The new Government can expect similar treatment.

Our armed forces' problems have remained the same since my last briefing. Britain's defence spending is inflated by a fifth of the defence budget spent on nuclear weapons. If you take nuclear out of the equation, defence spending is about 1.75% of GDP, around the middle of the European league table. This means that the armed forces need help to keep existing equipment running. Even the Royal Navy, seen as a gainer in recent spending rounds, must decommission ships because it doesn't have enough sailors. The Army is in even bigger trouble. When the Tories came to power in 2010, the British Army was over 100,000-strong. It is now due to fall to 72,500. 

Given the resurgent Russian threat, I found it pertinent to revisit Kenton White's book 'Never Ready: Britain's Armed Forces and NATO's Flexible Response Strategy, 1967-1989'. His use of newly available documents from the archives to show the failure of the flexible strategy is a stark reminder of the importance of learning from history. The concept was compromised by the failure of the Alliance members to provide one of the main legs of the conventional deterrent – sustainability. In particular, the highlighted limited ammunition reserves, a problem recently faced by Ukraine. We should learn the lessons from history on this, as they are crucial for a well-informed and effective strategy.

In an uncertain world, the government cannot afford to be weak on defence or create a glossy strategy that doesn’t address the underlying problems. As the head of the army has warned, we must be ready to fight a war in three years. The Defence Review should be comprehensive, including replacing the weapons sent to Ukraine and reversing Tory cuts, laced with more traditional Labour policies on support for veterans and ending failed outsourcing. I have previously set out how defence procurement should be reformed. My German colleague pointed to how the German government might take a stake in arms-makers and defence projects. This also points to the need for a detailed and comprehensive strategy that addresses all aspects of defence and security, including rebuilding our relationships in Europe.

The considerable uncertainty is the US elections. While the Trump campaign is imploding, there is a long way to go, and the result will likely be tight. Trump has said he is likely to be less supportive of funding for NATO and European security. It is reasonable to conclude that European powers will need to ramp up their investment in security. As Robert Dover puts it, “Trump’s tactics should not be seen as a surprise. They need to be planned for, financed, and procured for. Pretending they are surprising because they are uncomfortable is not a plan.”

The Defence Review claims that it will ensure that Defence is central to the security, economic growth, and prosperity of the United Kingdom. It needs to deliver on that commitment.

Pensions reform - time for action

 Pensions reform usually gets little political attention, so it's good to see the new UK government prioritising it. The Pension Schemes Bill, announced in the King's Speech, is taking forward measures announced by the previous administration, although hopefully with more urgency. As someone who advises on pensions and is a pension fund trustee, I have attended too many conferences only to be told there has yet to be progress on consolidation and the pensions dashboard.

More significantly, the new government has announced a pensions review with more radical aims. A first draft of the review is expected before the autumn budget, and new rules could be in place as soon as next year. Reforms are necessary because the current combination of 8 per cent minimum contributions, the £10,000 earnings trigger and the lower earnings limit on qualifying earnings produce inadequate savings for most UK workers. When you couple that with one of the lowest state pensions in Europe (38% of the EU average), we are storing up serious problems for the next generation of pensioners, particularly women and the low-paid.

A vital challenge for the taskforce of industry executives and ministers will be to propose ways to cut costs and improve investment options. The aim is to allow retirement scheme managers to boost pension pots by up to £11,000. Private pension funds currently impose massive charges on most pension products in pursuit of their profits. Expanding auto-enrolment without tackling charges will simply pour pension savings into the coffers of the City of London. You only need to look at what countries like The Netherlands have achieved to understand that there is a better way.

Another aim of the review is to ensure that pension funds are invested in the real UK economy. Most pension cash isn’t invested in any meaningful sense; it is gambled on shares, doing very little for the economy. Buying UK rather than overseas shares doesn’t change that, although it is absurd that only 2% of pension funds are gambled on British companies. In fact, some argue that pension saving damages the economy because it takes spending away from consumption. The UK has six and a half trillion pounds worth of pension fund money - roughly two and a half times our annual income. That money is not used creatively to invest in the UK economy.

Will Hutton correctly identifies a key problem – we have 30,000, often small, pension funds. There are around £225bn of stagnating surpluses, and the 2,000 very small, closed defined-benefit schemes should be merged into the highly successful Pension Protection Fund. He says, ‘Britain needs fewer and much larger funds than the smorgasbord of tiny, ­underperforming funds whose trustees guard their independence so jealously that property market nimbyism looks tame.’ The solution is larger funds, at least over £100bn, that can diversify risk sufficiently to invest more in productive UK assets.  

We should be starting with public sector pension schemes. Reeves has announced that the taskforce will push ahead with a merger of the 87 individual pension schemes in the Local Government Pension Scheme (LGPS) covering England and Wales. The LGPS is the seventh largest pension fund in the world, managing £360bn worth of assets, and spends £2bn on fees. Pooling the assets in the LGPS would enable the funds to be invested in a broader range of UK assets. 

We should be doing the same with the devolved Scottish LGPS. When I was the joint secretary of that scheme, we started looking at the options for consolidation and merger to cut costs and better invest the £36bn of assets. However, the project has moved at a glacial pace since 2018, primarily because of resistance from the small regional pension funds – the nimbyism Will Hutton was describing. 

I am more optimistic than some commentators that Rachel Reeves is serious about reforming our pension system. Getting these assets working properly for future pensioners and the broader economy is crucial to her growth mission. As the Scottish LGPS experience shows, she must push hard to get past the vested interests holding Britain back. 

It's Manifesto Time!

 It’s manifesto time. As someone who has drafted and haggled over a few in my time, I enjoy this part of an election campaign while recognising that this makes me a less-than-typical voter.  

You might think in a snap election that manifestos are hastily put together. However, in practice, the core policies will have been written months ago and tested on focus groups and polling, leaving just some updating before putting them into whatever governance arrangement the political party has. In broad terms, the manifesto is the opportunity to set out the details of party policy, rare in an era of sound-bite campaigning. It also provides a script for candidates and supporters. Some are more detailed than others, but there is pressure to say something about every policy area to avoid the accusation that the party is ignoring an interest group. Issues that are controversial, at least internally, have to be fudged to get agreement. 

 

It is legitimate to question the purpose of a manifesto in a rapidly changing world. This has been even more noticeable since devolution when most UK policy areas don't apply other than the knock-on spending commitments. There is also a strong case for more independent scrutiny of manifestos to at least reduce the dafter claims and counter-claims for the benefit of voters.

 I am only going to look briefly at the Conservative and Labour manifestos. I'm sure there are lots of interesting ideas in the Lib-Dem, SNP, and Green manifestos, but they are not going to be the next UK government. They also know that, so don't worry too much about their policies adding up. They make daft claims like the SNP on NHS privatisation and oil jobs. Only if we get a hung parliament, do they get interesting.

 

This really is a topsy-turvy election when the Tory manifesto is attacked for rash, uncosted spending commitments. The Tory tax cuts will cost £17.2bn a year by 2029-30, paid for by cracking down on tax avoidance and slashing the welfare bill by as-yet uncertain means. IFS and other think tanks warned there was a big risk the sums would not add up. 

I suspect the Tories decided they won't have to implement it, so let's chuck in many policies that appeal to their core vote to minimise the defeat. Examples are the triple lock plus, which provides a tax cut for pensioners - even if they only need one because the Tories have frozen the tax threshold. An analysis of the tax changes by the Resolution Foundation said that while the 20% of the wealthiest households would gain £1,300 a year on average, someone who paid £30,000 would see their tax bill fall by just £170. It’s not hard to see the target demographic here.

 In contrast, Labour constantly repeats the mantra that all policies are costed and funded. However, they have yet to go as far as 1997, when the party committed to Tory spending plans, even if, as the IFS points out, they are not far off that. Even Ken Clarke admitted that he had no intention of keeping to them. Gordon Brown later opened the taps, but he had a more robust economy and fiscal position to play with. I suspect Rachel Reeves is going to find it more challenging. 

 

I'm afraid I have to disagree with Keir Starmer's comparison of the Tory and Corbyn 2019 manifestos. I worked on that manifesto, and it was fully costed, with John McDonnell's Grey Book going into more detail than I have ever seen in a manifesto supplement. Peston and others make this point well. 

 

The Labour manifesto reflects a cautious fiscal approach to the election. Given the state of the public finances, this is understandable, but it is storing up problems for an incoming government. Reform can do some of the work, but the heavy lifting of putting the country back on its feet requires investment. Plugging a few loopholes is fine, but the anomalies around Capital Gains Tax need to be addressed, as does a tax on wealth.

 

I like the focus on long-term solutions – the mission-driven government. Short-termism has plagued our country in politics and business, and a new emphasis on industrial and infrastructure strategies, working with employers and trade unions, is the right approach. The early focus on national security is good, even if I want to see more urgency in getting to 2.5% of GDP. Particularly as we are wasting too much of the equipment budget on Trident. However, there is a welcome commitment to reform defence procurement, if little detail. Bringing the railways into public ownership is the right transport policy, and there are ways of doing the same with other vital infrastructure without breaking the bank.

 

The New Deal for working people is an important way forward as is bringing the cost of living into the minimum wage calculation and ending age discrimination. Consulting on implementing the plans is normal government, and practical issues over zero-hours contracts, in particular, need to be addressed. There is plenty in the energy section to like, even if it could be bolder. I doubt the 'broken energy market' will be fixed through more robust regulation. The English public service proposals will bring Scotland £470m of additional resources to tackle some of our problems. There is at least an understanding of the need to reduce health inequalities and that requires cross-cutting action.

 

The offer on the constitution is limited, an opportunity missed given that they can be radical at minimal cost. The failure to grasp the opportunities of further devolution, particularly going back on employment law, risks rebounding on Scottish Labour in 2016. After 18 months of financially constrained government, those soft SNP voters may decide they have only lent their vote. The polling for the Scottish Parliament elections is much tighter than Westminster, and the dial hasn’t shifted on support for independence.

 

Re-setting our international relationships is absolutely vital. While I would like to see stronger commitments to rebuilding relationships with the EU, that section gives a few hints that a new approach is possible without reopening Brexit. Getting Britain back on the world stage on issues like climate change is crucial.

Under devolution, UK manifestos have a limited impact on the issues that matter most to voters in Scotland. However, there is plenty to like on reserved issues like employment rights, defence, and international relations. The weakness is fiscal caution and the constitution, both areas where Labour needs to be bolder. As the IFS says, ‘delivering genuine change will almost certainly also require putting actual resources on the table’. Stability is vital after the chaos of recent years, but we will need more than managerial competence to tackle the deep-seated problems facing the UK.