Credibility and the confidence fairies

Low interest rates have nothing to do with "our hard-won credibility"

In 1994, the Conservative Government proposed a rise in fuel VAT from 8 per cent to 17.5 per cent. It was defeated by a Labour-backed motion and Shadow Chancellor Gordon Brown looked to have won a major economic battle. But Chancellor Ken Clarke made a stirring speech defending the economic fundamentals of the policy and accusing Labour of recklessly undermining the nation’s prosperity, culminating by calling Brown a "silly billy".

Today, David Cameron made his own stirring speech, laying out his plan for how Britain could finally begin a recovery. But like Clarke before him, he wanted to defend his economic fundamentals from the Labour line, saying:

Those who argue we should spend more want us to borrow more, driving up our deficit and our debt and putting our hard-won credibility and low interest rates at risk.

The argument behind all this is, of course, whether the government is right to make deficit reduction "line one, clause one, part one" or whether a slower approach would make the economy grow faster, which would increase the size of the pie, allowing more debt to be paid off.

Despite losing public backing for their tackling of the economy as well as outspoken criticism from the economics profession – for example, Nobel Prize-winner Paul Krugman here – the government will not be fazed.

And it all rests on one argument:

Government bond yields are at an all-time low, which means the UK is seen as a safe place of investment and therefore the government’s plan is the right one. Economics professors across the Golden Triangle must squirm every time they hear another one of their protégés pull this one out on Question Time.

And that is because the low-bond-yield argument is a choreographed hoodwinking of the British public. To say that our rates are 1.85 per cent, compared to 6 per cent in Ireland, 12 per cent in Portugal and 28 per cent in Greece, is like saying that the PM picks up a tan quicker than an inmate of Her Majesty’s Prison Service. Yields reflect risk, and in those countries, there is real risk that the Governments will default on their debts. The same has never been said of the UK.

Instead the "risk premium" paid on gilts is based on the fact that we are a safe haven in a turbulent financial world and investors are willing to accept lower returns than normal because their risk in the UK is relatively lower than in the Eurozone. But this is not normal. Look up any economics textbook, it will tell you that the more global investors buy Government bonds, the more they are at risk (of losing money if the pound depreciates), therefore the higher the risk and the rate will be; in normal times bond yields are high the more of them are supplied to the private sector.

Indeed, as Jonathon Portes highlights here, confidence has grown in the UK at the start of 2012 (as measured by the rise in share prices of FTSE250 companies) and the bond-yield has risen alongside it. His graph is below:

More worryingly, a recent paper has shown empirically that current ten-year bond yields are a good benchmark of growth rates in ten years’ time. That would mean 1.85 per cent growth by 2022- the OBR expect 3 per cent growth by 2015.

But what about the interest rates that the PM is so keen to keep down for the sake of struggling homeowners?

As an economy grows in confidence and bond yields rise, yes, eventually interest rates should rise too, so mortgage and loan repayments will increase. But surely this is to be expected in a healthy, growing economy, with increasing incomes?

A Manchester United fan, for example, must accept that the price of supporting Manchester United is that you will pay higher ticket prices than you would as a Wigan fan.

Low interest rates are a symptom of the problem, not the solution.

This can be seen quite clearly in a country whose interest rates and bond yields have been rock bottom for over a decade: Japan. The charts below compare GDP (only up to 2007, to focus more clearly on growth trends before the recession), 10-year government bond yields and interest rates for the UK and Japan since 1992, when the Japanese economy sank into a recession from which it has never fully recovered.

Click for big

Indeed, Japanese homeowners are now accustomed to close-to-zero interest rates following a “lost decade”. Is that the ultimate aim of the UK Government’s austerity plan? If not, they might be forced before long to accept that Labour had it right all along. Silly billies.

Pictured: Confidence fairies. Maybe. Photograph: Getty Images

Dom Boyle is a British economist.

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An unmatched font of knowledge

Edinburgh’s global reputation as a knowledge economy is rooted in the performance and international outlook of its four universities.

As sociologist-turned US Senator Daniel Patrick Moynihan recognised when asked how to create a world-class city, a strong academic offering is pivotal to any forward-looking, ambitious city. “Build a university,” he said, “and wait 200 years.” He recognised the long-term return such an investment can deliver; how a renowned academic institution can help attract the world. However, in today’s increasingly globalised higher education sector, world-class universities no longer rely on the world coming to come to them – their outlook is increasingly international.

Boasting four world-class universities, Edinburgh not only attracts and retains students from around the world, but also increasingly exports its own distinctively Scottish brand of academic excellence. In fact, 53.9% of the city’s working age population is educated to degree level.

In the most recent QS World University Rankings, the University of Edinburgh was named as the 21st best university in the world, reflecting its reputation for research and teaching. It’s a fact reflected in the latest UK Research Exercise Framework (REF), conducted in 2014, which judged 96% of its academic departments to be producing world-leading research.

Innovation engine

Measured across the UK, annual Gross Value Added (GVA) by University of Edinburgh start-ups contributes more than £164m to the UK economy. In fact, of 262 companies to emerge from the university since the 1960s, 81% remain active today, employing more than 2,700 staff globally. That performance places the University of Edinburgh ahead of institutions such as MIT in terms of the number of start-ups it generates; an innovation hothouse that underlines why one in four graduates remain in Edinburgh and why blue chip brands such as Amazon, IBM and Microsoft all have R&D facilities in the city.

One such spin out making its mark is PureLiFi, founded by Professor Harald Haas to commercialise his groundbreaking research on data transmission using the visible light spectrum. With data transfer speeds 10,000 times faster than radio waves, LiFi not only enables bandwidths of 1 Gigabit/sec but is also far more secure.

Edinburgh’s universities play a pivotal role in the local economy. Through its core operations, knowledge transfer activities and world-class research the University generated £4.9bn in GVA and 44,500 jobs globally, when accounting for international alumni.

With £1.4bn earmarked for estate development over the next 10 years, the University of Edinburgh remains the city’s largest property developer. Its extensive programme of investment includes the soon-to-open Higgs Centre for Innovation. A partnership with the UK Astronomy Technology Centre, the new centre will open next year and will supply business incubation support for potential big data and space technology applications, enabling start-ups to realise the commercial potential of applied research in subjects such as particle physics.

It’s a story of innovation that is mirrored across Edinburgh’s academic landscape. Each university has carved its own areas of academic excellence and research expertise, such as the University of Edinburgh’s renowned School of Informatics, ranked among the world’s elite institutions for Computer Science. 

The future of energy

Research conducted into the economic impact of Heriot-Watt University demonstrated that it generates £278m in annual GVA for the Scottish economy and directly supports more than 6,000 jobs.

Set in 380-acres of picturesque parkland, Heriot-Watt University incorporates the Edinburgh Research Park, the first science park of its kind in the UK and now home to more than 40 companies.

Consistently ranked in the top 25% of UK universities, Heriot-Watt University enjoys an increasingly international reputation underpinned by a strong track record in research. 82% of the institution’s research is considered world-class (REF) – a fact reflected in a record breaking year for the university, attracting £40.6m in research funding in 2015. With an expanding campus in Dubai and last year’s opening of a £35m campus in Malaysia, Heriot-Watt is now among the UK’s top five universities in terms of international presence and numbers of international students.

"In 2015, Heriot-Watt University was ranked 34th overall in the QS ‘Top 50 under 50’ world rankings." 

Its established strengths in industry-related research will be further boosted with the imminent opening of the £20m Lyell Centre. It will become the Scottish headquarters of the British Geological Survey, and research will focus on global issues such as energy supply, environmental impact and climate change. As well as providing laboratory facilities, the new centre will feature a 50,000 litre climate change research aquarium, the UK Natural Environment Research Council Centre for Doctoral Training (CDT) in Oil and Gas, and the Shell Centre for Exploration Geoscience.

International appeal

An increasingly global outlook, supported by a bold international strategy, is helping to drive Edinburgh Napier University’s growth. The university now has more than 4,500 students studying its overseas programmes, through partnerships with institutions in Hong Kong, Singapore, China, Sri Lanka and India.

Edinburgh Napier has been present in Hong Kong for more than 20 years and its impact grows year-on-year. Already the UK’s largest higher education provider in the territory, more than 1,500 students graduated in 2015 alone.

In terms of world-leading research, Edinburgh Napier continues to make its mark, with the REF judging 54% of its research to be either world-class or internationally excellent in 2014. The assessment singled out particular strengths in Earth Systems and Environmental Sciences, where it was rated the top UK modern university for research impact. Taking into account research, knowledge exchange, as well as student and staff spending, Edinburgh Napier University generates in excess of £201.9m GVA and supports 2,897 jobs in the city economy.

On the south-east side of Edinburgh, Queen Margaret University is Scotland’s first university to have an on-campus Business Gateway, highlighting the emphasis placed on business creation and innovation.

QMU moved up 49 places overall in the 2014 REF, taking it to 80th place in The Times’ rankings for research excellence in the UK. The Framework scored 58% of Queen Margaret’s research as either world-leading or internationally excellent, especially in relation to Speech and Language Sciences, where the University is ranked 2nd in the UK.

In terms of its international appeal, one in five of Queen Margaret’s students now comes from outside the EU, and it is also expanding its overseas programme offer, which already sees courses delivered in Greece, India, Nepal, Saudi Arabia and Singapore.

With 820 years of collective academic excellence to export to the world, Edinburgh enjoys a truly privileged position in the evolving story of academic globalisation and the commercialisation of world-class research and innovation. If he were still around today, Senator Moynihan would no doubt agree – a world-class city indeed.

For further information www.investinedinburgh.com