Students and rail users ‘penalised by flawed inflation measure’ | Business

Students and rail passengers have been unfairly penalised by the government using a “flawed” measure of inflation that needs to be urgently fixed, according to a highly critical report from peers.

Ministers have been able to use a tactic of “inflation shopping” to select the retail prices index measure of inflation when it stands to benefit the exchequer, and the typically lower consumer prices index to keep a lid on outgoings, the House of Lords economic affairs committee said.

The peers said the government was doing this despite knowing there was an error in the calculation of RPI, which typically made the measure of inflation about 0.5% to 0.8% higher than CPI.

Changes in 2010 to the way in which clothing prices were collected to formulate RPI caused the problem and meant the statistic was “flawed”, the report said.

The committee warned the UK Statistics Authority, responsible for overseeing economic figures, was at risk of breaching its statutory duties and the Whitehall agency’s refusal to fix the problem was “untenable”. While urging RPI to be fixed, it said the government should only use CPI until the error was removed.

The government is gradually moving away from using RPI to CPI, with further plans to use another measurement of inflation known as CPIH, which also includes housing costs as well as the usual price changes measured by CPI.

“Winners and losers” have however been created by the use of RPI instead of CPI in the meantime, according to the committee’s report. Investors in RPI-linked government bonds have been receiving about £1bn more in interest payments each year, even though others have lost out.

Research from the House of Commons library suggested students were saddled with up to an additional £16,000 of debt as a consequence. Average rail fares rose 3.1% at the start of the year, above the rate of increase in average pay packets.

Michael Forsyth, the chairman of the committee, said: “When the government gives money to people it is generally opting to adjust payments for inflation using the consumer prices index. But when it takes money from people, it is generally opting to use the retail prices index, which has been around 1% higher than CPI in recent years. This simply is not fair.”

A spokesperson for the Office for National Statistics, which publishes inflation data on a monthly basis, said: “We agree the RPI has significant shortcomings. We will therefore continue to work closely with our counterparts in government and at the Bank of England and respond to the committee.”

A Treasury spokesperson also said RPI was flawed and added it was moving away from using it.

“Given the extensive use of RPI across the public and private sectors, further moves away from the measure are complex and potentially costly. As set out at budget, the government’s objective is that CPIH will become its headline measure over time and that it will reduce the use of RPI when and where practicable,” the spokesperson said.

Credit card demand faces record drop as Brexit spooks borrowers – as it happened | Business

Theresa May to miss Davos


Greek PM wins confidence vote, but pressure remains

School teachers protesting in central Athens today

School teachers protesting in central Athens today Photograph: Petros Giannakouris/AP

Over in Greece, where the government has survived a late-night confidence vote, fears of snap elections have been put on the back burner.

However, ministers’ relief is being clouded by warnings that, once again, Athens is dragging its feet on reforms.

A jubilant Alexis Tsipras may have survived the vote – welcoming his narrow 151-148 ballot victory as “a vote of confidence in stability ” – but the challenges before him are far from over.

The first is passage of the landmark Macedonia name-change accord that prompted the leftist leader to call the confidence motion after the Independent Greeks party, his coalition’s junior partner, quit in protest over it. Pulling the same hat trick is far from certain. With the centrist Potami party wavering, it remains unsure if he will win a decisive majority.

Although Tsipras has touted the renewal of confidence in his government as the card he needs to push ahead with other initiatives – from increasing the minimum wage to implementing a new payment scheme for unpaid social security contributions – his government faces growing pressure from the creditors who have bailed out the debt-stricken country to keep up with reforms.

Addressing the Greek-French chamber of commerce and industry in Athens on Wednesday night, the EU Economic and Financial Affairs Commissioner Pierre Moscovici said it was crucial that politicians stayed the course. “Greece has not yet reached the end of the road,” he said insisting that five months after exiting its third international bailout, foreign auditors were still watching the country closely. “The coming weeks will be decisive … it is very important that politicians don’t disengage from the agenda of reforms.”

Auditors, who return to Greece next week, are especially worried about Tsipras’ pledge to push ahead with handouts – not least raising the minimum wage – and the high stock of nonperforming loans in Greek banks which have played a central role in impeding Athens’ hopes of returning to capital markets.

Like every government before it, the Tsipras administration faces immense anger over enforcement of reforms with thousands of teachers taking to the streets- and civil servants walking off the job – today.

Demand for mortgages and credit cards hit by Brexit


US accused of “technological McCarthyism” over Huawei probe

China’s Ministry of Finance has hit out at US authorites for launching a criminal probe into Huawei.

MOFa spokesperson Hua Chunying has told reporters that China is concerned by the “unusual handling” of the case by US prosecutors, suggesting it was driven by political considerations.

Hua added that if civil cases are used “arbitrarily to suppress Chinese enterprises then this is not only a violation of free and fair business competition but a violation rule of law.”

China’s media are also critical of the move, giving another insight into Beijing’s thinking.

Global Times wrote in an editorial today in response to the WSJ story and the proposal from US lawmakers to ban chip sales to Huawei that the ‘persecution of Huawei’ is a form of ‘technological McCarthyism”.

It says:

“America’s treatment of Huawei is full of geopolitical daggers… The US is angry because of China’s progress. If China wants to keep developing, China needs to bear these kinds of setbacks.”

“The US has prevented these companies from remaining separate from politics. The US has branded Huawei and ZTE as political, and this is a technological Mccarthyism.”

Huawei probe worries markest

WSJ: US authorities probing Huawei



Introduction: Japan urges fight against protectionism


Only a rupture with the EU will alter the failed status quo | Larry Elliott | Opinion

The pound rose, and all was calm on the stock market. As far as the financial markets were concerned, the message was clear: the voting down by MPs of Theresa May’s withdrawal agreement means a delayed Brexit, a softer Brexit or perhaps no Brexit at all. Those with serious wealth in Britain have always been worried that Brexit will lead to radical change. They now think that there will be a perpetuation of the status quo – or something not far removed from it. Hence the pound getting stronger.

There’s no question that opting for the quiet life has its attractions. There would be a boost to the economy as companies decided to push ahead with investment plans that had been delayed while the outcome of Brexit was uncertain. And, of course, any economic costs of no deal would be avoided.

The EU’s single market is more than a free-trade area. It aims to remove not just the fiscal barriers to trade (tariffs) but the physical and technical barriers (borders and divergent product standards) too by allowing as free movement as possible of goods, capital, services and people. In essence, it is about treating the EU as a single trading territory. See our full Brexit phrasebook.

If the Bank of England is to be believed, these could be very high indeed. Just before Christmas, the Bank said the economy could shrink by 8% in the event of a disruptive no-deal outcome – a bigger recession than that seen when the global financial system came close to meltdown in 2008. But this was a worst-case scenario and the Bank had to throw in the kitchen sink to arrive at it. The idea, for example, that interest rates would rise by four percentage points after a no-deal Brexit is implausible. More likely, the Bank would join with the Treasury in using every available policy tool – including lower interest rates – to boost growth.

More realistic projections have been provided by the consultancy firm Capital Economics. It forecasts that the economy will grow by 1.4% this year if May’s deal is eventually agreed, by 1.5% if a delay to the article 50 process leads to a softer Brexit, and by between 1% and -0.2% in the event of no deal, depending on whether it is orderly or not. Still a cost, in other words, but much more modest.

Even so, why bother suffering any cost at all if it can be avoided by leaving things as they are? That seems like a reasonable argument, but in reality it is based on a series of doubtful assumptions.

The first is that voters care only about economic growth. But if that were the case, they would support fracking and concreting over the green belt, both of which would lead to higher levels of activity. The second – voiced by business lobby groups – is that it is not possible to do better than the status quo because unemployment is low, real wages are growing, the City is the world’s financial hub and the UK is an attractive destination for inward investment.

The third – shared by the European commission and some in the remain camp in the UK – is that there is nothing much wrong with Europe either. The EU is the world’s biggest market; the four freedoms allow for the movement of goods, people, money and services across the continent; and the euro has been a success.

Yet in reality the UK has malfunctioned badly since the 2008 financial crisis, suffering a prolonged period of weak productivity growth and flatlining living standards. Investment has been weak. Most of the jobs created have been low-wage and low-skill.

As for the rest of Europe, the eurozone was even slower to recover from the crash, in part because of the design flaws of monetary union and in part because its addiction to neoconservative economic dogma resulted in supercharged austerity programmes.

Brexit, the gilets jaunes protesters in France, the terrible pain inflicted on Greece and the support for the League/Five Star government in Italy all tell their own story. Europe is alive with political discontent that reflects the demand for deep and urgent reform, but the chances of getting it are less likely if the status quo prevails.

Why? Because the forces of conservatism are strong. Change comes about only when the pressure for it becomes too great to resist. The financial crisis provided one such opportunity to reform an economic system that for many people clearly wasn’t working; Brexit was a second. The left’s case for Brexit has always been based on the following notions: the current economic model is failing; socialism is needed to fix it; and the free-market ideology hardwired into the EU via the European Central Bank, judgments of the European court of justice and treaty changes will make that process all but impossible without a break with the status quo.

It is theoretically possible that in the event of a “Brexit in name only” or no Brexit at all, policymakers will push ahead with what’s needed in order to make a reality of the slogan “a reformed Britain in a reformed Europe”. Possible but not all that plausible, given that it would require breaking up the euro, more autonomy for individual countries to intervene in the running of their economies, and a simultaneous philosophical U-turn in the big member states.

Much more likely is that the pressure for change will dissipate and the real grievances of those who voted for Brexit will be quietly forgotten. The softer the Brexit, the more convinced the EU will be that it has been doing the right thing all along. Britain will not go up in flames, but there will still be consequences. Leave voters will feel they have been victims of an establishment stitch-up. The anger will not go away and will eventually resurface.

The risk is that the losers will be the biggest supporters of the EU – the liberal left. And the biggest winners will be the extreme right.

Larry Elliott is the Guardian’s economics editor

UK inflation falls to lowest level in two years | Business

UK inflation fell to its lowest level in nearly two years in December after a drop in petrol prices offered some respite to consumers who are reining in spending as Brexit looms.

The annual rate dipped to 2.1% from 2.3% in November, the weakest since January 2017, according to the Office for National Statistics. Economists said the drop reduced the likelihood that the Bank of England would raise interest rates in the near future.

Petrol prices fell to an eight-month low in December after a drop in the price of crude oil. The cost of a litre of petrol fell by 6.4p between November and December, compared with a rise of 0.8p a litre in the same period a year earlier.

Inflation is when prices rise. Deflation is the opposite – price decreases over time – but inflation is far more common.

If inflation is 10%, then a £50 pair of shoes will cost £55 in a year’s time and £60.50 a year after that.

Inflation eats away at the value of wages and savings – if you earn 10% on your savings but inflation is 10%, the real rate of interest on your pot is actually 0%.

A relatively new phenomenon, inflation has become a real worry for governments since the 1960s.

As a rule of thumb, times of high inflation are good for borrowers and bad for investors.

Mortgages are a good example of how borrowing can be advantageous – annual inflation of 10% over seven years halves the real value of a mortgage.

On the other hand, pensioners, who depend on a fixed income, watch the value of their assets erode.

The government’s preferred measure of inflation, and the one the Bank of England takes into account when setting interest rates, is the consumer price index (CPI).

The retail prices index (RPI) is often used in wage negotiations.

The cost of air and sea travel rose less than it did a year earlier, which also contributed to the fall in inflation. Clothing and footwear prices fell 0.9% in the year to December as retailers slashed prices in a bid to win customers over the crucial festive trading season.

Mike Hardie, head of inflation at the ONS, said: “Inflation eased mainly due to a big fall in petrol, with oil prices tumbling in recent months. Air fares also helped push down the rate, with seasonal prices rising less than they did last year. These were partially offset by small rises in hotel prices and mobile phone charges.”

CPI rate of inflation

The easing of consumer price rises in December took the inflation rate to just a touch above the Bank of England’s official target of 2%, giving policymakers breathing space to consider Brexit developments before making a move on interest rates.

Ruth Gregory, senior UK economist at consultancy Capital Economics, said: “With inflation within a whisker of its 2% target, the [Bank’s rate-setting] monetary policy committee will probably feel comfortable in waiting until Brexit uncertainty is resolved before moving again.”

The Bank of England has raised interest rates just twice since the depths of the financial crisis in 2009, once in November 2017 and again in August 2018, taking the benchmark cost of borrowing to 0.75%.

The drop in inflation – in line with economists’ forecasts – provides welcome relief for consumers, hit by higher prices in the aftermath of the 2016 Brexit vote as the sharp fall in the value of the pound pushed up the cost of goods imported from abroad. Inflation peaked at 3.1% in November 2017, well above average wage increases of 2.3% at the time.


  • Olive oil, butter and margarine: +6.1% in December, compared with previous month.
  • Bread and cereals: +2.5%
  • Furniture and furnishings: +2.3%
  • Newspapers and magazines: +1.6%
  • CDs, DVDs and downloads: +1.3%


  • Petrol, diesel and motor oil: –4.4%
  • Spirits: -3.6%
  • Beer: -3.3%
  • Computer software: -3.1%
  • Cosmetics, toiletries and personal care: -1.2%
  • Tobacco: -0.1%

Pay growth is now back above inflation, at 3%, but surveys have indicated that consumers are taking a more cautious approach to spending as they are uncertain about what impact Brexit will have on household finances.

Howard Archer, chief economic adviser to the forecasting group EY Item Club, said inflation was likely to fall further as a result of lower oil prices and Ofgem’s price cap, which is expected to put some downward pressure on domestic energy prices from January.

Archer said: “Consumer price inflation could dip below 2% in January and stay below that level for much if not all of 2019. We see inflation averaging 1.8% over 2019, and it could get as low as 1.6%.”

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Flybe’s sale is right for staff and passengers | Nils Pratley | Business

What a day for democratic debate! Well, not at Flybe. Shareholders, still reeling from the board’s decision last Friday to accept a takeover offer at 1p a share, or just £2.2m, have now learned they won’t get a meaningful vote on the deal. The directors have instead agreed to flog the regional airline’s assets almost immediately at the same price to the same bidder, a consortium comprising Virgin Atlantic, Stobart and investment firm Cyrus.

Is that even legal at a public company? It seems it is, or rather it will be on Thursday, which is when Flybe switches its stock market listing from “premium” to “standard” status. The latter does not require shareholders to approve major asset sales.

Flybe dropped its bombshell in a clunky statement that barely bothered to explain what has changed since last Friday to require a revised rescue plan to be forced through in a hurry. Simon Laffin, chairman for the past five years – so in the cockpit for most of Flybe’s descent to 1p – should have treated his investors more courteously. Some were praying that, against the odds, a rival bidder might show up.

Yet Laffin and the board’s decision is correct. Last week’s proposal required cash-strapped Flybe to make peace with its banks and credit card processors and secure a credit facility of £20m. Instead, the banks and card firms are still playing tough, which was perhaps predictable since a proposed rescue is not the same as an actual rescue, especially when ex-Stobart chief executive Andrew Tinkler suddenly snapped up 12% of Flybe’s stock.

Thus there was a need to get cash in the door quickly to keep flying. A sum of £10m was duly injected by the buying consortium as it got a deal to secure the assets by mid-February at the latest.

From the point of view of Flybe’s shareholders, it feels outrageous: their voting rights have been trampled upon. Yet what was the alternative? If collapse was an imminent threat – and it seems to have been – the important thing was to protect the interests of 2,400 staff, pensioners and booked passengers. It had to be done.

But praise for Laffin stops there. He still has to explain to investors why Flybe left it so late to put itself up for sale. The process started in November. Why not earlier?

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Boohoo sheds no tears for Asos

Who’s the UK’s top online-only fashion retailer? In sales terms, it’s Asos – and always has been. The firm started earlier than everybody else and has been in rapid expansion mode since 2005. It will shift about £2.7bn worth of garments this year.

In terms of stock market capitalisation, though, it is tight. Little ol’ Boohoo, with annual revenues of just over £800m, is suddenly worth roughly the same – about £2.2bn.

One can understand why. It’s not just that Boohoo, which also controls the PrettyLittleThing and Nasty Gal brands, is growing more quickly, with revenues up 44% in the last four months of 2018. It’s also that Boohoo achieves a respectable operating profit margin – about 9.5%, according to Tuesday’s update. By contrast, Asos stunned its shareholders with a pre-Christmas warning that margins will go as low as 2% this year.

What explains the apparent gulf in profit efficiency? Is it because Asos is bearing the costs of building more warehouses overseas, a task Boohoo may one day have to face as it follows a similar expansion plan? Or is it because Boohoo only sells its own brands and doesn’t have to deal with third parties? Hard to say, but 2% versus 9.5% is very wide gap, and Asos has yet to explain how it will close it.

The January naysayer has spoken (again)

Albert Edwards is the City’s best-known bear and his annual January prophecy of doom is always worth hearing. This year’s highlights included a hard landing in China, a eurozone crisis born in Italy and a US Fed tightening too fast.

But attendance at the Société Générale analyst’s show is also a rough indicator of the City’s mood. When investors are rattled, as they were in 2017, after the UK referendum and Trump’s election, it can be standing-room-only in a Mayfair hotel conference room that holds 950. Monday’s event, however, was about two-thirds full. Reassuring? Actually, no. Edwards reports the market always goes up in years when the place is packed. Be warned.

The primacy of climate change | Letter | Environment

The Guardian is the only newspaper to recognise the seriousness of the threat we face from accelerating climate breakdown. Yet you, like Labour, still treat it as an “add-on” – as a separate subject, not something that, in Naomi Klein’s words, changes everything. Thus Jonathan Haidt and Pamela Paresky (Opinion, 10 January) write about the mental effects of childhood stress, never mentioning how terrifying it is for children to live in an environment of existential threat coupled with denial. Thus Owen Jones (Opinion, 10 January) discusses Labour’s Brexit choices and the need to reverse austerity, with no recognition that redistribution must now be within an economy focused on reducing emissions to net zero by 2030, not on “good” growth. All discussion of Brexit or any other policy issue should now be in the context of the need for central and local government to enter emergency mode.
Caro New
Green party of England and Wales campaigns coordinator (jobshare)

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Scandalous increase in school exclusions | Letters | Education

Last year I gave a paper based on my book Immoral Education: The Assault on Teachers’ Identities, Autonomy and Efficacy to academics in the Netherlands. When I told them that part of my argument was the rate at which young people were being excluded from schools and gave them the figures, the response was that “if that were happening here there would be national outrage”. The UK figures are now even worse (School exclusion rates in London double the national average, 12 January). The most recent figures from the DfE reveal that 7,720 young people were permanently excluded from schools in 2016-17. Of these, more than half were in year 9 or above. Children eligible for free school meals were more than four times more likely to be excluded than those not eligible, children with special educational needs more than six times more likely than those not, and there were disproportionate numbers from certain ethnic heritages among those excluded. Although schools are the agents of this phenomenon, the reasons for this scandal lie deeper in the nature of education and the pressures on schools to perform, and are in urgent need of greater understanding and alternative strategies.
Dr Simon Gibbs
Reader in educational psychology, Newcastle University

Thank you for raising the issue of school exclusion. I was the head of alternative provision at the Ashford school which Dré Clinton-Barnes attended. Ashford schools do not permanently exclude, and the school he attended had comprehensive alternative provision which meant no fixed-term exclusions (one-, two- or five-day). Sadly, due to funding issues, this provision has now been largely dismantled. I was made redundant and I am now back in mainstream teaching. Schools can do more for children like Dré. There are inclusive models available that allow challenging and vulnerable students to stay within mainstream education. However, school leaders who might pursue this more moral and effective path are hampered by lack of funding and the need to meet government targets and Ofsted criteria.
Paul Moran
Hythe, Kent

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Magistrates and short jail sentences | Letters | Society

Petty offenders are only jailed way into a long pattern of offending and failure to respond to non-custodial sentences. Prison is employed by magistrates usually as a last resort as the bench knows full well that rehabilitation in these days of austerity is unlikely – it is unlikely even for longer sentences.

When the courts have tried all non-custodial punishments escalating from discharges, through fines, to low-level community penalties, medium community penalties, then high-level community penalties, and the drug user/habitual yob on a hair trigger/recidivist hasn’t responded, what does Rory Stewart suggest they do next (Jail terms of six months or less could be scrapped, prisons minister suggests,, 12 January)?

Unless we are going to go down the same route as the USA and start putting people away for years for repeat minor offending (which really would see an explosion in prison numbers), the only option for someone with a history (often a long, long history) of, for example, shoplifting bacon or razors to pay for their drugs is to get them off the streets for as long as is permitted and give the poor bloody corner shop owners a break.
Martin Steer JP
Rangeworthy, Gloucestershire

I applaud Rory Stewart’s idea of ending short-term prison sentences, even if it is for kneejerk financial reasons. Short-term prison sentences serve as a doubly whammy. If you are sentenced in this way, particularly a woman with children, you lose so much more than your liberty – housing and potentially your children. The knock-on consequences for ex-prisoners continue after release, especially in relation to employment.

However, this initiative puts the cart before the horse. We need a real overhaul of what has been a disastrous dismantling of the probation service. The privatised community rehabilitation companies need to be called to account, and, if not fit for purpose, should be disbanded and incorporated back into the national probation service. We need to look again at intermittent custody, another initiative that was underfunded and -resourced, and abandoned before it had a chance to prove itself.

Community sentences are not a cheap or easy alternative to custody, so if Rory Stewart is looking to reduce financial costs he’s in for a shock, but the long-term gains for individuals and the community are worth the investment.
Christine Walters
Retired magistrate, Buxton, Derbyshire

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On Brexit, Jeremy Corbyn only listens to the Leavers. Why? | William Keegan | Business

‘So what,” the schoolboy son of a friend asked, while being forced to listen to the Today programme on the school run, “was politics before Brexit?”

This brought back memories of my own naive inquiry of my father at the end of the second world war: “Will there be any more news, Daddy?” Not too enlightened for an embryonic journalist, but you can see the point.

Many people, not least your correspondent, are concerned about the way the threat of Brexit has been diverting attention from a host of economic and social problems. Yet the focus on Brexit is necessary, because if it were allowed to go ahead, in any form, it would magnify those domestic problems, and be almost bound to have a deleterious impact on international relations.

As it is, I am lost in admiration for the way our European partners have put up with our ministers making juvenile complaints about them – for all the world as if the other 27 had made a request to abandon us, rather than the reverse.

As one of my Brussels contacts wrote to me in a New Year message: “We are watching with hard-to-describe feelings.”

Now, in common, I imagine, with many others, I find myself watching the behaviour of the leader of the Labour party with hard-to-describe feelings. My feelings towards some of his colleagues are easier to describe. It is obvious that Sir Keir Starmer, the shadow Brexit secretary, has been doing his level best to try to knock some sense into Corbyn. The latter’s recent revelation in the Guardian to my colleague Heather Stewart that, if elected prime minister he planned to go ahead with Brexit, was deeply offensive to the vast majority of Labour members, who are Remainers.

Perhaps Corbyn thinks he has been playing a clever game, keeping the Leave minority of Labour voters on board. However, this is at the expense of alienating the vast majority.

Given the popular view that the referendum result was principally swayed by the discontent of the “left behind” and those with “nothing to lose”, I was interested in the point Corbyn made last week that the left-behind in Mansfield may have voted Leave but the left-behind in Tottenham elected to Remain.

But what do you make of a so-called leader of the opposition who “cannot wish away the votes of 17 million people who wanted to leave”? What this means, given the preponderance of Labour people who voted to remain, is that a Labour leader affects to be swayed more by the Conservative supporters whose government he wishes to dislodge. It is as if, in the early 1980s, he would have opted for Thatcherism, or sado-monetarism, because more Conservatives voted for what the Conservative government of that era became.

Corbyn is a walking and talking disaster. Just imagine how different things would be now if the increasingly impressive Yvette Cooper had beaten him to the Labour leadership. She is right to back an extension to article 50 – a move also championed by the estimable Lord Kerr, who, when in the Foreign Office, actually drafted article 50.

Bad business, referendums, creating the opportunity for the surfacing of discontents that often have nothing to do with the nominal issue at hand. And I keep having to remind people that a host of very prosperous people voted Leave, for reasons best known to themselves.

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Nevertheless, bad business though referendums may be, it seems to me that we are moving towards the need for yet another – a referendum to end referendums.

Now, as Robert Shrimsley observes in the Financial Times, a second referendum requires Corbyn’s support, but “that support is not forthcoming since he is not interested in stopping Brexit, only in bringing down the government”. But the truth that dare not speak its name is that, in the face of the worst Conservative government most people can remember, Labour should be 20 or 30 points ahead in the polls. One has an awful suspicion that Corbyn is incapable of winning an election anyway.

Good luck to Starmer, Cooper, Hilary Benn and others in trying to bring their leader to his senses. He it was who decreed that Labour party policy should be determined by the members. I don’t know Corbyn’s taste in music, but my friend the impresario Lee Menzies recently reminded me of that Ira Gershwin line: “Let’s call the whole thing off.”

William Keegan’s new book, Nine Crises – Fifty Years of Covering the British Economy From Devaluation To Brexit, will be published by Biteback on Thursday 24 January

Is it time to trim the UK Treasury? | Larry Elliott | Business

The Treasury is the most powerful institution in Whitehall. It is actually a super-ministry combining functions separated in many other countries: management of the economy and control of the public finances.

These two functions are not accorded equal weight and never have been. The Treasury has always been primarily a finance ministry that views its main task as ensuring the nation’s budget arithmetic adds up.

Down the ages, the Treasury has argued there is nothing incompatible about its two objectives. Running a tight ship helps growth, it is said, because it leads to the financial markets having more confidence in the government. If the City is relaxed about the public finances it charges lower interest rates on the money it lends to the state. Lower interest rates lead to higher growth.

Conversely, trying to stimulate the economy through higher budget deficits doesn’t work because the extra public borrowing leads to a loss of confidence in the markets, higher interest rates and lower growth. In the jargon of the trade, public borrowing crowds out private investment.

This doctrine has been challenged down the years. Keynes railed against the so-called “Treasury view” when he was making the case for higher public investment to tackle high unemployment in the late 1920s and early 1930s.

George Brown

George Brown headed the new DEA but his power was neutered by Harold Wilson’s refusal to devalue the pound. Photograph: PA

Thirty or so years later Harold Wilson’s 1964 Labour government thought the way to raise Britain’s growth rate was to set up a bespoke ministry – the Department of Economic Affairs (DEA) – completely separate from the Treasury and run by a heavy-hitting cabinet minister, George Brown.

Yet Wilson in effect neutered the DEA by ruling out a devaluation of the pound. An overvalued exchange rate meant the Labour government had no chance of hitting its ambitious growth targets. Financial stability was accorded a higher priority than the real economy. The Whitehall turf war between the Treasury and the DEA became a no-contest.

Tony Blair’s government tried a different solution. Under Gordon Brown, the Treasury sucked in functions from other departments and became a ministry for everything: welfare, regional policy, productivity, overseas aid and jobs.

But since Labour fell from power in 2010, the Treasury has reverted to a more traditional approach. The size of the budget deficit that resulted from the financial crisis alarmed not just the incoming chancellor, George Osborne, but his senior mandarins as well. The overriding aim of Treasury policy from May 2010 onwards was to cut spending to get the deficit down. It was left to the Bank of England to stimulate growth through ultra-low interest rates and quantitative easing. Vince Cable, when he was business secretary in the 2010-15 coalition government, had plenty of interesting ideas for reviving manufacturing but was forced to live off the scraps from Osborne’s table.

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But this approach failed to recognise three things: that there was a limit to what monetary policy could do; the hit to growth that would be caused by the hasty and aggressive enforcement of austerity; and the extent of the damage left by the financial crisis. Each year the Office for Budget Responsibility (OBR), the body given the job of economic forecasting by Osborne, predicted that productivity growth would return to its pre-crisis levels and each year it was disappointed. In the end, the OBR simply accepted that even with a rising population the economy could only grow by about 1.5% a year – which is what it has been doing for the past couple of years.

The Bank of England thinks there is nothing more it can do to boost Britain’s growth rate without triggering higher inflation, which is why it is gradually raising interest rates. Any pick-up in the trend growth rate from 1.5% will come about from improvements to the supply side of the economy, which will mean higher and better directed investment, innovation and a better-skilled workforce.

The economy has not changed fundamentally in the past decade. Consumer spending is the mainstay of growth; manufacturing is weak; the trade deficit troublingly wide. These are age-old problems that werethere before Britain joined the European Economic Community have remained unsolved in the years since, and will remain to be tackled whatever the Brexit outcome.

The EU referendum led to some soul-searching in government. Why had people in the old industrial areas voted to leave the EU in such numbers? Why was the economy so unbalanced between north and south? Why were so many of the jobs being created low skilled and low paid?

These were the right questions. But while the EU referendum made it easier to identify the problems, it also made it harder to start finding the solutions because so much of the government’s focus for the past two and a half years has been on Brexit rather than on what needs to be done to make a success of its industrial strategy.

That inevitably brings us back to the power of the Treasury to stop things happening. Labour’s answer to Whitehall’s imbalance of power is to give the Bank of England a productivity target to sit alongside its inflation target. But the shadow chancellor, John McDonnell, has yet to make clear how Threadneedle Street could do this, given the limited policy tools at its disposal.

An alternative would be to give responsibility for the industrial strategy and supply-side reform to a new properly funded department for the economy. That would, of course, be resisted by the Treasury, and wouldn’t be enough on its own. But put the most senior member of the government in to run the new department and announce that the way to get the public finances right was to get the economy right rather than vice versa and there might be real change.