The Economist

[Blakesley]

A weekly newspaper which, contrary to its name, covers more than just business. Liberal, centrist, supportive of immigration, free markets and globalisation, its readership skews towards the high income and the highly educated. Backed a continuation of the Coalition in 2015, and endorsed the Liberal Democrats in 2017. Unsurprisingly, it supported Remain in the referendum.

Circulation: c. 75,000 per month

[Blakesley]

Brexit
Leaving the public behind

A year after the referendum and with an election and two new prime ministers in between, it remains an open debate what Brexit actually means. Polls find that, much like the 52-48 result of the referendum, voters are similarly divided between what Brexit should look like.* They also yield unsurprising information: remainers believe in a soft Brexit, leavers want a hard Brexit. The opinion of Leave voters, however, is not within the majority view of the public.

 Preferences for type of exit from the EU, by vote in the EU referendum

The confusion, however, is amplified by the messaging of the Leave campaign and statements made by leading politicians. For example, suggesting that free movement could end, while the United Kingdom could remain in the free market. Likewise, soft Brexit can entail options ranging from membership in the Single Market (Norway) to a customs union with the EU (Turkey). The debate over free movement seems to be central to how voters view Brexit. If free movement is guaranteed as part of a "soft Brexit" deal, support for a hard Brexit rises, while support for a soft Brexit falls.  

 
 Preferences for type of exit from the EU, by vote in the EU referendum. On left, if "soft Brexit" includes retaining free movement. On right, if "soft Brexit" explicitly excludes it.

Likewise, there remains significant divides amongst the voters for each party regarding what path to choose. Forced into a choice, Liberal Democrat, SNP, Plaid, and Green voters largely start to side with a "soft Brexit" - though some adamantly want Brexit to be called off. Labour voters want, by and large, a soft Brexit - though there is a sizeable portion who are amiable to a hard option in northern and rural constituencies. Conservative voters, conversely, want a hard Brexit, but they have a core of supporters who are content with a soft Brexit - mostly centered in London and the South East.

 Preferences for type of exit from the EU, by vote in the 2017 general election.

Even more stark is the impact of free movement on party political opinions. Though the inclusion of free movement as a condition for a "soft Brexit" does not change the distribution of Conservative voters (the roughly 20% of Conservative voters backing a "soft Brexit" are largely not as turned off by free movement as others), the change is stark for 2017 Labour voters - an increasingly large group of whom now prefer a harder Brexit (though a majority support the soft option). The geographic divide here is particularly stark. Labour voters in Leave voting constituencies in the North are dramatically more likely to prefer a hard Brexit in this scenario, while those in Remain constituencies - particularly in London and Scotland - are more likely to prefer a "soft Brexit".

 
Preferences for type of exit from the EU, by vote in the 2017 general election. Question specifically included "free movement" as part of a "soft Brexit".

 No matter what direction the government chooses, it appears that, at some point, a significant part of the public will not have their view of Brexit implemented. The questions is who's opinion gets left behind?

  *YouGov did not poll remaining in the European Union as an option.

[Axon]

The State (quite literally!) of the Energy Industry in the UK

With the Government making specific references to ‘net-zero’ in their legislative agenda for the coming year, the Economist offers an insight into the state of the energy sector in the UK.

The method of generating energy has not changed since the invention of electricity. Something - and at one point, someone - needs to turn a turbine which drives a generator. This process turns mechanical energy into electrical energy via some clever stuff with electromagnets. The most critical challenge within the energy industry for the coming years will inevitably be how energy is generated, should some of these ‘net-zero’ goals even be remotely achievable. The UK has a diverse mix of sources. In 2016, total generation via coal stood at 9%, gas at 42%, wind & solar at 14%, oil at 2%, other renewables at 8% and finally, nuclear at 19%. Imports from other countries made up missing capacity. With this analysis, traditional fossil fuels (coal, oil, gas) are still responsible for more than half (53%) of electricity generation in the UK.

Natural gas power stations are relatively new in the UK - at least in comparison to coal. Coal power stations are much older. Ratcliffe-on-Soar in Nottinghamshire, for example, has been in service since 1968. Modernisation has occurred, but much of the infrastructure and process remains unaltered. Most of the existing energy infrastructure takes shame in these large industrial sites, with centralised generation methods. When they were designed, they were principally intended not to be turned off very often. These large machines take time to ‘boot up’ and start generating energy, so turning them on and off is quite inefficient. However, as the focus shifted toward renewable energy - which tends to vary as to the power they can produce due to climatic conditions - energy generators have had to make their assets more flexible when the grid needs energy. For example, if the wind is strong on a particular day, the need for traditional methods of power generation is less, as renewable sources can meet the demand. However, the UK's climate means this can change very quickly, so operators always have to be on hand to make up for the potential deficit left by offshore wind not having the same capacity as earlier in that day.

Traditional power stations with large moving parts also serve a secondary purpose. They allow a concept called ‘inertia’ to be generated. This is where power is ‘pushed’ onto the grid, which allows power to be transmitted most commonly via overhead lines throughout the grid. Renewable sources do not provide this level of inertia as they are much smaller, so a sudden change in climatic conditions could lead to localised power outages. The reason behind is is that an imbalance will exist on the grid in the delay between the inertia being available via traditional methods. Consequently, you have a deficit between the demand and supply of energy.

One method for solving this problem is decentralising energy production to have smaller, localised methods of generating electricity combined with energy storage technologies such as batteries to help the grid deal with the imbalance, as mentioned earlier. However, technology here is very much in its infancy, and private companies - as the UK’s energy market is made entirely of - do not expect to see much of a profit - if any at all - in using these technologies so early in their conception. This results in the intentions of generators and the stated aims of the UK Government being in conflict as a primary method to shift to renewable energy generation won’t yield any profit for some time. To summarise the topic of grid imbalance - you cannot just turn off the big traditional generation assets in favour of renewables. The grid cannot cope and will not be reliable this way. This won’t come as good news to anyone wishing to go on a decarbonisation journey.

The security of supply is of paramount importance to the Government - this is obvious, which makes the issue of how we source our fuels even more curious. To produce the energy mix mentioned in this article, we are net importers of 417 TWH (terawatt-hours) of our natural gas from elsewhere. So regarding maintaining the security of supply, the UK doesn’t come up remarkably well in being self-sufficient with its fuels. Of course, it goes without saying that with the closure of the vast majority of coal mines, the UK are also a net importer of coal and also oil.

The challenges the UK and the rest of the world listed above are only a surface-level picture for the reader of the challenges the energy sector will face if the Government wants to achieve a goal of net zero. Some elements have been somewhat simplified for brevity and to try and widen the general knowledge about the sector's challenges. The topic of alternative fuels such as hydrogen is only beginning to emerge from the depths of academic papers—more on that in the next issue.

 

[Blakesley]

The Conservative Party
In search of unicorns

 

Unicorns are imaginary creatures that, if you believe the stories, wander the fields and forests, are gentle, and might have some magic to them. Certainly they inspire magical thinking. Which is perhaps why is surprising that one doesn't need to read a children's story or search the woods to find one. Instead, one can travel to Conservative headquarters in central London and find a unicorn of their very own.

During his campaign for the leadership, Tory leader Dylan Macmillan floated policies on the personal allowance and so-called dementia tax - costly ones to be sure. In Parliament, Macmillan and his top team harangued Labour for their tax and spend ways. Shortly thereafter, James Manning, the shadow chancellor, stood up and declared he would deliver more investment, higher spending, lower taxes, and a falling deficit. In the context of a hard Brexit that will harm growth, this is a beyond fanciful proposition. It is a unicorn proposition - but a nice sounding one.

The problem with unicorns is that they don't have priorities: it's hard for imaginary creatures to understand the trade offs between lower taxes and hiring more doctors. The problem the Conservatives have, right now, is that we don't know their priorities either. If raising the personal allowance and funding for social care - two priorities outlined by Mr Macmillan - conflict, it's unclear which one wins out in the end.

The latest row over Brexit within the Tory Party is evidence of this reality. While Mr Macmillan seems to have indicated that the UK will need a deal to leave the EU, it remains unclear. His deal and red lines are likely unachievable, as they currently stand. For all their flaws, the ERG believes firmly in a direction of travel. By 29 March, 2019, per the ERG telling, the UK must be out of the EU. The same such clarity is missing from Mr Macmillan. His Brexit, as his exchange with Andrew Neil indicates, is about checklists, not a finish line. And nobody knows what the finish line looks like if he can't check every box.

Critiques of their white paper - and there are many - aside, it's increasingly clear what Labour want from Brexit and that it's not a fanciful experiment. There are no unicorns floating through Harry West and Anneliese Dodds minds. Critiques of their economic policy - and there are many - aside, it's clear that Labour understands that one can't have everything: taxes must rise for spending to rise.

The benefit of opposition is that the opposition party doesn't have to govern. Oppositions get to forsake hyper-specific policy proposals in favour of setting a philosophy of governance. They get to reconsider what matters to them, broadly, and make the case to the public that those things should matter to them as well. But, as they do so, it's important that they stand for something achievable. Being everything, everywhere, all at once is a philosophy that theoretically appeals to unicorns - as nonexistent beings they have that luxury. Britain's politicians are not so fortunate.

[Axon]

In conversation with: Chancellor of the Exchequer on the Royal Mail Nationalisation

The Economist sat down with the UK's Chancellor of the Exchequer, Harry West, following his statement to the House of Commons on the Governments' intention to bring Royal Mail back into public ownership after 5 years operating as a private corporation; a transition which happened during the Cameron-Clegg coalition Government in 2013. His full statement can be found here.

Mr West, thank you for meeting with me today. You've just got back from Parliament where you have made a big announcement about bringing Royal Mail back into public ownership. Can you tell me at a high level what motivated the Government to do this, beyond the manifesto commitment of course:

Thank you so much for coming in. Well we did make the promise to the British people and we were determined to keep that of course. But first and foremost, we believe that the privatisation was a mistake in the first place. Royal Mail has been in public hands for  centuries. It was - and is - a vital public service and public asset. That should be run for public good, not private profit. That in turn protects the taxpayer's long investment in and history with Royal Mail, as well as the universal service that it provides.

If the sale goes through before the end of the year, it will have been 5 years of private ownership of the Royal Mail - what is your general assessment of the operations of Royal Mail during that period? What specifically went wrong?

I have a huge amount of respect for everyone involved in the operations of Royal Mail. This isn't about pointing fingers at any worker or manager or executive. But its been clear that since privatisation, and indeed the tun up to it, that there has been an increasing focus on the short term corporate bottom line and not on the public good that Royal Mail is there to provide. That was an intended policy objective of the privatisation, we disagree with it, and so we are reversing it.

Would you be making the same decision if the profit surpassed that during public ownership? What I am getting at Mr West is what do you say to those who say this is purely an ideological mission to keep Royal Mail in public hands?

Well there is a belief - call it ideology if you like - that public services should be run for public good. And that a public asset built up over centuries should be owned by the people that built it up not chucked out in a firesale. If Royal Mail makes a profit in the public sector - and I fully expect it will, as it did before it was privatized - then those profits are either reinvested in the public service of the postal service and uplifting it for everyone or they are supporting other public services as a return on the public's longstanding investment. Both are preferable, in this case, to the outcome in the private sector.

Do you see those profits being ringfenced just for investment in the postal service and surrounding infrastructure, Mr West?

Well that's the point really: it's a judgement we would make over time based on what Royal Mail and its customers and workers need to perform its vital public service, not based on securing any particular short term return for investors. I don't expect all the profit to go on the postal services, no, but if it needed to then its an option that we would have that I don't believe that private investors would be so willing to exercise.

Do you think the average person posting a letter will see a discernible impact from this change? If not immediately, when do you foresee this paying dividend for the taxpayer?

I think for people who rely on their local post office and the service royal mail delivers through it, the difference will be in maintaining that universal service that keeps people - particularly older people, in rural areas - connected to loved ones. My expectation is that for taxpayers, the Government will make those decisions with Royal Mail. But the recent return on Royal Mail shares has been around 6% - much higher than the financing cost of the government bonds we are exchanging for the stock.

Are we to expect any more so-called "expansions of the state" in the coming months/years throughout this parliament?

Our manifesto commits to specific approaches for other public utilities and services: for example, bringing the rail system back into public ownership as franchise agreements expire and transitioning to a publicly owned and decentralised energy supply and water system. We will bring forward proposals to discuss with other parties in Parliament and table the proposals in our manifesto. I also recognise that any further measures will need a majority in Parliament

The initial investment of the state is naturally a comparatively large cost. Do you have the fiscal instruments at your disposal to help deal with the ongoing costs associated with running these businesses long-term, particularly if they are in need of capital investment in infrastructure?

Well the initial investment is really an exchange not a cost. And the return on the investment is almost certainly larger than the cost of financing the debt we exchange for it. The Government can raise finance far more cheaply than the private sector on these long term assets. If you look at Scottish Water - still owned by the public - it has no problem raising money and in fact  the public pays less for their water than they do in England.

How would the Government intend to deal with any long-term debt held by any organisation which the Government wishes to bring into public ownership?

We would honour that debt, of course. When and where public ownership happens, it will be consistent entirely with the UK's rules based system: compensation would be market based and we would honour all obligations.

We would look at refinancing debt where possible and where they would achieve lower interest rates, where it is appropriate.

One last question Chancellor - what do you see as the future of the Royal Mail for the rest of this parliament. Working on the assumption the sale goes through without complication, what will be the Governments intended direction for the company?

This is a transition, it isn't about changing everything all at once. Imminently, the priority is just that the sale and transition goes off without a hitch, and service for customers is maintained. I have full confidence in Moya Greene and her team to achieve that.

After that, my intention is that Royal Mail takes a look at its business plan and its change programmes in light of the Government's stated objectives for the postal service, and in particular a renewed focus on public service alongside its obligation to its shareholders. I look forward to those productive discussions with its management and its workers on that at the time.

The Economist thanks the Chancellor for his time.