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Katie Caldwell, Marketing Executive Volterra

Some Surprises - But Not Many

The Budget this year was perhaps the most leaked ever: a far cry from the occasion when a Chancellor was sacked for blabbing Budget secrets.  Only the changes to allowances now being dubbed the 'granny tax' really provided much surprise which is perhaps why the journalists have fallen on them with such glee, though the detail may be less impressive than the headlines.

Overall, this was a neutral, steady as she goes, affair with much tinkering and re-announcements, and promises of more substantive stuff to come.  Those who compared this budget with the confusions and sleights of hand in Gordon Brown's Budgets have some justification, although the Red Book is still a lot clearer than in his day.

And there was one announcement which pleased me very much.  As a Commissioner for the Public Services Trust 2020, I strongly argued for the benefits of tax transparency and that people should have a clearer explanation of how their taxes were used, particularly in relation to the services that they consume.  And the Chancellor has picked up this idea and is going to implement it.   This may seem a small step but bringing the scary and incomprehensible billions down to the scale of the tax payer themselves will give a much more informed and realistic debate about value for money.

I was also pleased, but without the frisson of surprise, at the reduction in the top tax rate.  Although 45p is still higher than in most other leading countries and is even higher when national insurance is taken into account, this is a step in the right direction for enterprise and even the tax take itself.  Having helped in garnering support and letter writing on the matter, it was nice that HMRC confirmed that not much tax is actually being raised by hiking top rates.

Of course, the cut is being balanced by rises in the tax on high value property which could bring to an end the surge in prices across central London, but the constraints on supply may be more effectively bolstering prices than the tax in denting them.

There is nothing wrong in a boring budget with no surprises in a time of uncertainty and wobbling growth.  The OBR has opined that government finances remain on track.  the balancing act between cuts and taxes may just be about right.

Bridget Rosewell

21st Century Policy Development





21st Century Policy Day - the Breakfast Panel!

   I spoke last week at a fascinating day on how policy development needs to be rethought, organised by Synthesis of which I am an Associate. The day made clear that both the techniques now available to us (computer modelling, simulation techniques) and our understanding of the elements of our problems (dynamics, feedbacks, behaviours, networks) suggest that we are making as big a policy shift as when big government first became fashionable in the twentieth century.

Then people believed, from the Webbs to Gordon Brown, that government could solve all our problems and make us be happy. Now we are more sceptical of these claims, even though we are starting to measure happiness, and of our government’s ability to devise and execute appropriate policies. Hats off to Matt Hancock and Jesse Norman, MPs who supported last week’s conference and opened and closed it with their own perspectives.

My own contribution to the debate was from my engagement over the couple of decades with infrastructure projects. I found it hard to stop grinning when the Chancellor, in his Autumn Statement, stated that infrastructure supports economic growth, since this is a case I have been making for more than a little while. However, the analytical underpinnings of this argument and how it relates to both the financing and the funding of projects is still not well articulated or understood and I talked about some of these issues in relation to investments that I have been involved in, such as Crossrail, High Speed rail, Thames Gateway Bridge (and more).

Successful policy development requires several different perspectives and this was illustrated in the context of security policy as well as infrastructure. Generating the right analysis is one essential element, but asking the right question is an important starting point, and getting support across the spectrum for a new approach is also key. The right analysis has to address the right question. ‘Is this railway worth paying for?’ is a good question and leads to asking who will pay for it and why. Is it passengers? Or property developers? Or does the taxpayer have to cough up for something unspecified, such as a welfare benefit?

Clear questions also require clearly articulated answers and the challenge to analysts and modellers is to provide models that policy makers can understand and challenge. Models cannot capture everything – by definition they are simplifications. Are the simplifications the right ones? Outcomes are inherently uncertain. Can the model show the likely range of outcomes with any degree of robustness? Our policy makers need to ask these questions of analysts rather than rely on a black box and their academics and civil servants.

There is a risk that one set of black boxes will be replaced by another set – cleverer ones no doubt. I hope not. I myself try to present arguments that have a common sense element but can be backed up by data and models. I need policy makers and politicians to challenge me and everyone else to make sure I succeed in creating these so that we can have a healthy policy debate rather than a technocratic one.

Bridget Rosewell, Partner at Volterra

Photo credit: © Zarina Holmes / Synthesis ISP

High Speed 2 – What Can We Know?

Henry Overman, in the most recent issue of Centre Piece, the journal of the Centre for Economic Performance, concludes that he is sceptical of the benefits of the proposed High Speed line, because the opportunity cost is high. He wonders whether this is the best way to spend government money and if there are more effective projects.


This is a conclusion that is very seductive and needs careful examination. A series of smaller projects, invested over shorter periods, offer more certainty about both their costs and their benefits. They will not be game changers and can therefore be analysed in the context of ‘business as usual’. The Eddington review also came to the conclusion that sets of smaller projects had better ratios of benefits to costs.

The proponents of large projects therefore need to be clear both about their own assumptions and those on which the conclusion above is reached.

In the UK, we undertake extensive cost benefit analysis to reach conclusions about the value of investment. These are based, as Overman points out, on values of time about which it is possible to argue both about values and the ability to work on a train. He comes to no conclusion on these issues – although they are key to the comparison of cost benefit ratios of projects by which one might conclude that small projects are better.

The opponents of High Speed 2 have, after all, made great play of the proposition that it is not ‘worth’ £17bn of taxpayer funding to save 20 minutes in getting to Birmingham. I would agree that if this were the only argument, then it does seem a rather expensive toy.

Overman goes on, however, to point out rightly that the bigger argument about HS2 is about getting to Manchester, Leeds, Sheffield and Newcastle – and indeed points further North – quicker. The argument is really about growth. This is dismissed by Overman as likely to promote growth in the South as readily as in the North. If increased growth is desirable, this might not matter of course, but in fact we know that cities with the fastest employment growth have also seen the fastest growth in rail trips and we know that better and quicker trips attract more travellers. Overman’s dismissal seems to me to be premature, especially when this is such an important part of the case.

I am disappointed that someone who has sat on the HS2 analytical challenge panel has not made some more fundamental challenges. In a stable economy we might choose to invest in transport to save people time, or to give them more pleasant journeys. When the economy needs to change and grow, we are investing for quite different purposes – to make it possible for cities to reinvent themselves and reach new markets. So we cannot compare ‘small’ projects designed for the former purpose, with large projects designed to foster growth.

The Jubilee Line Extension did not pass the cost benefit test. But Mrs Thatcher decided to build it anyway, and now it is full and has been essential to getting Docklands regeneration off the ground. Growth, anyone?

Sorry Henry – get more challenging.

Bridget Rosewell, Managing Partner Volterra

The 50p Tax Rate and Writing Letters

The Daily Telegraph inferred on Monday Feb 27th that the 50p tax rate was bringing in less than expected since income tax receipts are not rising alongside other taxes. This is potential confirmation of the proposition I and others made last summer in a letter to the Financial Times. In the letter, we argued that such a tax would do more harm than good, damaging innovation and entrepreneurship and deterring mobile workers.

I was involved in canvassing economists to sign the letter and indeed appeared on various radio and television shows to support the argument. Now it appears that the evidence on our forward looking argument may well have been right.

Nonetheless the tax exists so what was the point of such a letter? Certainly not simply so that we could say ‘I told you so’ later. Rather we hoped to influence the terms of the public debate on these matters and make it possible to defend lower tax rates. Who knows, it might even be possible to defend bonuses!

Not everyone agrees that economists should write letters to the papers. Alan Manning, professor of economics at the London School of Economics, thinks that such letters are all about how many signatories a letter has rather than its content. So he thinks there should be few signatories, and that a letter must provide ‘serious evidence’. This seems to mean waiting until the damage has been done, rather than warning of potential for damage.

It is true of course that economists can hold themselves above the fray, never coming to a conclusion until the evidence is overwhelming – although I have never encountered an economic proposition with which reasonable economists all agreed. On the other hand, if an economics background and training is useful, it should be useful in the policy debate. And if a group of economists draw attention to a concern that they share, this seems to me to be a useful thing to do.

Professor Manning thinks that such letters undermine the reputation of economists. I’m not sure with what constituency since most people think our reputation is pretty low anyway. Perhaps engaging sensibly with sensible debates on which opinions can vary and evidence be ambiguous might be a way to raise it.

Bridget Rosewell, Managing Partner Volterra

Post-Crisis Economics

A conference last week brought together a variety of economists from academia and policy to discuss what changes the discipline should produce post the financial crisis and what changes should be made to degree studies.


There was probably a consensus that micro economics had made more progress than macro in recent years and that students should be taught more economic history (and possibly the history of economic thought), but beyond this there was perhaps insufficient willingness to engage in setting out the principles of the subject. John Sutton suggested that we would only be able to say we had a proper subject discipline when we could say that 95% of a textbook was true – when I asked the audience later to say whether they thought even 50% was true, no hand at all went up. I hesitated to try and find out whether there was any percentage a majority would have signed up to! I did wonder whether we should run an auction to decide the agreed proportion – an area where there is probably a consensus that progress has been made – but didn’t have any rules to hand.

If teachers and practitioners are unclear what truth there is in basic teaching, what can the subject be about? One teacher suggested it was about ‘thinking like an economist’ which I defined as considering incentives, balancing costs and benefits, asking about market failures. This is certainly how the distinction feels in public policy. Of course, this has nothing to say about whether equilibrium is a useful concept, or whether maximisation is possible.

John Kay stressed that different problems would need different approaches and modelling techniques and that economics was too often a technique in search of a problem. Andy Haldane drew attention to the importance of networks in many markets and how standard economics made no allowance for the impact of one market participant on another. But the group did not really focus on these approaches, and I think largely prefers to consider how adjustments can be made to the existing approaches to maintain as much as possible of the canon – even though it is not true!

Hardly anyone referred to learning from other disciplines, whether anthropology, biology, psychology, philosophy or history, although many of these are making contributions to how economies work. A particular contribution comes from physics as Paul Ormerod pointed out.

Of course there are circumstances in which the standard model of independent market participants, able on average to build a good model of the market, in a rational way, will be a sensible approach. But there are many circumstances when these conditions will not hold. It was noteworthy that innovation, growth, and disruption got little coverage at the conference. What is the model for considering large scale investment which will change connectivity between markets for example? What about technical innovation which disrupts markets? These are the sorts of changes which have been a distinguishing feature of capitalism and which have made possible the standard of living, health and longevity we now enjoy. We didn’t discuss these and we must.

I think that the conference showed that economics continues to have good problems, and it has some good skills. But it still lacks a set of good theories and quite often lacks good data as well.

Bridget Rosewell, Managing Partner, Volterra

Co-operation and Competition

Ed Mayo, ex-head of the New Economics Foundation and now of Co-ops UK, has an interesting blog (read here) on the importance of co-operation in our economic system rather than competition. This is a really challenging and difficult topic.


Co-operation is extremely important to the successful functioning of the market-oriented economies of the West. But this is not because of co-operation as an organisational structure. The dominant form of corporate structure for over 100 years has been the shareholder-based joint stock company, and not organisations based on co-operative lines. But nevertheless, co-operation between firms is essential.

The most important reason for this is very simple. Complex economic systems contain many linkages between the different component parts. In an evolutionary context, we can think of a competitive relationship between two firms being expressed by a negative connection between them. If one does well, the other is likely to lose out, and its fitness is reduced. In contrast, a co=-operative relationship is positive. If one does well, the fitness of the other is increased, and vice versa.

Economic theory focuses exclusively on the competitive links. But these are dominated by the co-oerative ones. The structure of production is the reason why. Most economic activity does not involve the final consumer, the individual. It is business to business. So if a firm learns to produce something more efficiently, or if it innovates successfully, the companies to which it supplies benefit.

More generally, co-operation is needed to agree institutional structures in which economic activity can take place. And it is the basis of most contractual agreements. It is impossible to specify in complete detail most business-to-business contractual relationships – look at the massive difficulties caused by Brownite thinking on this in terms of the relationships between regulators and the regulated in the relevant sectors of the UK economy. A strong element of trust is required.

But all this co-operation, which pervades successful capitalist economies, has nothing to do with the organisational form of companies. It can, and indeed has, shown itself in a system dominated not by co-operative but by joint stock firms.

I have been interested in this for some time, and here is a very technical paper which examines what happens in an evolutionary system when most of the linkages are competitive and not co-operative.

Paul Ormerod, Managing Partner Volterra