Brexit won’t happen – Just ask the bookies


Recent surveys about Brexit depict a very close race between the supporters of ‘Brexit’ and ‘Bremain’. Basing itself on the last 6 polls, The Telegraph asserts that the gap has narrowed to a thin 51-49 majority in favour of remaining in the UK. The Week has drawn similar conclusions: the 2% difference between ‘In’ and ‘Out’ supporters is insignificant if we consider that 4% of voters admitted to be unsure about their vote.


The question now becomes: to which extent can we trust surveys? And are there alternative, more reliable sources of wisdom? In the UK, the answer is ‘definitely yes’ and is in the hands of the likes of Ladbrokes, William Hill and Betfair.

James Surowiecki
James Surowiecki

As explained by James Surowiecki in his book The Wisdom of Crowds, betting markets are great ways to aggregate heterogeneous opinions across a given population. More importantly, by putting their own money at stake (by definition), bettors should not focus on their own views but predict the outcome of the vote instead. Provided that the market is liquid enough, academics such as Justin Wolfers built on Surowiecki’s work to demonstrate that, actually, those markets were the most accurate predictors of future event outcomes – and were given the name of ‘prediction markets’ as a consequence.

Betfair_logo.svgWhat are the odds then? Well, all bookmakers concur to assert that the situation is much clearer than the polls suggest. The odds of a ‘Bremain’ on Betfair, the leading betting exchange platform (i.e. a platform where players take bets against each other), have been fluctuating between 1.30 and 1.60 over the last few days, which translates into a probability range of 62% to 77%. This takes into account the recent bombings in Brussels which slightly revived the ‘Eurosceptic’ sentiment – see green arrow in the chart below. According to the same bookmaker, the exact split as of yesterday was 65-35 in favour of ‘Bremain’, with more than £2.7m worth of matched bets.

Historical evolution of ‘Bremain’ odds. Source:

Beyond bookmakers, the world of finance also provides us with a number of prediction markets. The evolution of the GBP/USD exchange rate, for instance, is another way to assess the relative ratio of power between the two sides if we believe that a Brexit would translate into a significant depreciation of the pound. This type of analysis, however, does not allow us to deduct a precise probability of ‘Brexit’ happening but can only track its relative evolution.

Historical evolution of USD/GBP FX rate. Sources: Oanda, author analysis.
Historical evolution of USD/GBP FX rate, with selected time averages.
Sources: Oanda, author analysis.

Given the high stakes, the political establishment will undoubtedly keep a close eye on these indicators over the next few months. Will they prove accurate?

For those unfamiliar with Betfair, here is a short corporate video presenting the basics of the betting platform.

Letter to FT – Housing prices are a threat to London’s standing

In an earlier post I mentioned the very interesting column Michael Skapinker published in the FT 3 weeks ago on the impact of house prices on London’s influence. I took the liberty of sending him my thoughts and a shortened version got published in the FT last week. You will find the full version below.


Dear Sir,

As regular reader of the Financial Times, I would like to thank you and congratulate you for your very wise column in yesterday’s paper entitled ‘House prices in London must fall if the city is still to be top’. I largely share your opinion and I am thus writing you to share some of my observations.

First, let me give you a bit of context. I am 29 years old and I arrived in London from France almost 7 years ago. I started my career as a strategy consultant and I am now working for a private equity fund – like tens of thousands of my compatriots here. I got married in 2012 and I am now the father of a 2-year old kid.

My friends who stayed in Paris told me that the first step on the rent or property ladder was usually the hardest: the Parisian housing market is narrow, landlords are asking for a ridiculous amount of guarantees when they are renting to young professionals and flatshares are often prohibited. The situation, nonetheless, seems to get simpler as they get older: higher salaries, more confident landlords and, for many, the possibility to get a foot on the property ladder when they are in their early 30s.

In London, my impression is that the situation is reversed. In one hand, it is indeed easy and flexible for a young talented professional with a job in London to find a room – albeit most often in a flatshare as you rightly pointed out. The situation remains largely unchanged after marriage – although ‘Double Income No Children’ couples can afford to rent their own studio rather than staying in a flatshare.

On the other hand, the situation gets increasingly complicated when you have a kid. The school system in London is either prohibitively expensive or prohibitively complex depending on the path you choose (public or private). Households relying on a single income (e.g. if the mother stays at home) or not working in the financial services sector financially struggle to rent a 2-bed flat while coping with the demands of the expensive ‘London way of life’.

Personally, I have come to London with many of my fellow students and I have since then witnessed two waves of departures: the first one took place 3-4 years ago, when some decided that a first experience in London of 2-3 years was enough and they decided to look for a stable family life in Paris. The second one is happening now, where I see married couples with young babies deciding to pack because they cannot make it work financially.

Root causes are multiple and have already been largely covered, including in your newspaper. I am convinced that London primarily suffers from a strong housing supply-demand imbalance and that the implementation of a bold housing construction programme would partly alleviate the tension. I also believe that the way London is organised and the high transportation costs play a role. London is a very vast city and, despite a tight bus network, the tube is certainly the safest way for Londoners to cut their commute time. As a consequence, the price of houses located near tube stations tends to soar. Similarly, tube fares are among the highest in the world and some Londoners are ready to pay more in their rent if this helps them save money on their transport budget – this drives the price of centrally-located houses up. Those two factors combined create a huge variance in house prices depending on their location. A couple of weeks ago, in an article entitled ‘London homeowners dig down as property prices shoot up’, the Financial Times mentioned that the average price of a home is 2.5 times higher in Chelsea than in Battersea, which is located just a few minutes away. As a matter of comparison, the ratio between the most expensive and the cheapest areas in Paris is no greater than 1.8 times – and we are talking about opposite sides of the city.

Last but not least, you mention in your article that sales of £1m-plus properties have fallen. Only time will tell whether this drop is the sign of a wider ‘market cooldown’ or just a pause until uncertainties surrounding the financial place of London (e.g. Brexit, stock market crisis) are dispelled.

I cannot agree more with your conclusion. London needs structural change to maintain its worldwide leadership. Time alone will only worsen the situation and could in the long term transform the city in a giant ‘gentlemen’s club’, where only those who invested early enough would be financially able to stay.

I would be delighted to continue the discussion if you wish – in the meantime, I thank you for your time and your consideration.

Best regards,

Quentin Toulemonde


A budget for “the next genera(l elec)tion”?


On Wednesday the Chancellor of the Exchequer George Osborne announced the budget for the fiscal year 2016-2017, a “Budget that puts the next generation first”. The content and the form of this speech have been widely debated in the press already. Without repeating what has already been written, here are a few thoughts:

  1. Brexit has definitely taken its toll. This is the first budget speech since the overwhelming Tories victory in last year’s general elections. With the House of Commons under their control, the context was ideal to outline an ambitious budget instead of delaying the bulk of the government budget rebalancing effort to the end of the parliament – we are talking about a £32bn reduction in Public Sector Net Borrowing (PSNB) between 2018-2019 and 2019-2020. An interesting analysis compiled by Torsten Bell for NewStatesman and reproduced below shows that PSNB is only reduced the year after general elections, and tend to soar the year before. And yet, the next general election is planned for… 2020. Unfortunately, Mr. Osborne as well as the rest of the Tories establishment will bet their political future in 3 months’ time. If the UK gets out of the EU, this future will be rather short-lived. As a consequence, this budget speech was partly design with the intention of rallying the Eurosceptics, especially those living outside London – hence the focus on the importance of devolving power to “our nations” and the lengthy discussions on local issues such as “enhanced capital allowances to the enterprise zone in Coleraine” or the “upgrade [of] the A66 and A69”. The Chancellor made use of the carrot but resorted to the stick as well, warning that the Office for Budget Responsibility (OBR)’s growth forecasts, and ultimately the budget equilibrium, were based on the assumption that the ‘Remain’ vote would win in June.
Credit: NewStatesman

2. Raising a fiscal surplus – Mr. Osborne’s self-imposed mantra – is an unpredictable mission, especially when the goal is positioned in a distant future. According to the OBR, by 2019-2020, all the efforts outlined by the Chancellor will only offset the drop in fiscal receipts generated by the latest OBR’s GDP growth forecast reduction (0.5% p.a.).

Changes to public sector net borrowing in 2019-2020
Changes to public sector net borrowing in 2019-2020

Furthermore, there is a very high chance of seeing the forecast revised again multiple times over the next few years, making the target even harder to hit. Finally, history has demonstrated that a higher than expected growth rate does not always lead to lower borrowing.

3. Similarly, the PSNB will largely depend on the uncertain evolution of the Bank of England’s interest rate. Unemployment at a 40-year low and wages growing by 2.1% over the last 12 months could well translate into sustainably higher inflation in the medium-term – the Chancellor indicated that it was forecast to reach 1.6% next year -, which would ultimately force the Bank of England to raise the cost of money. With a debt to GDP ratio approaching 85%, public finances would obviously be significantly impacted by such a change.

4. For the reasons listed above, some aspects of this budget appear as slightly unexpected and Mr. Osborne could well hide a different political agenda. Two options come to mind immediately. The first is that Mr. Osborne will resort to the same tactics towards Brexit as the one he used last year in the aftermath of the general elections, by issuing a revised budget as soon as the vote outcome is known – although this could come at a possibly unbearable political cost. The second option is that, as hinted by George Eaton, Mr. Osborne is actually preparing the ground for an early election which could free his hands to achieve his massive PSNB reduction ambitions in 2019-2020.

You can watch the replay of the Budget Speech below:

On red boxes and helicopters

George Osborne
George Osborne and his case

George Osborne, the Chancellor of the Exchequer, will present the next Government’s budget tomorrow. Although it is not official yet, this year’s Budget has already triggered a general outcry given the various alleged tax increases that have emerged in the press, including an increase in fuel duty, and has raised fears about the return of ‘austerity policies’ – which Mr. Osborne’s interview video below will not alleviate. We will have the opportunity to discuss the key measures once they have been made official. In the meantime this post presents the difficult conundrum Mr. Osborne has to confront.

Firstly, Mr. Osborne bets a large chunk of his political credibility on this budget. After hinting a fiscal surplus – a result that has rarely been achieved in the past -, boosted by promising economic prospects in sight, the Chancellor got caught by the real world and a disappointing economic recovery in the UK, whose 2015 GDP has been revised downwards by £18bn in December 2015. And yet, an apathetic economic activity translates into lower tax receipts for the government – up to £50bn over the course of the parliament. In order to partly offset this unexpected ‘black hole’, Mr. Osborne has to rely on a mix of public spending cuts and tax increases. The first lever will consist of “50p [of cuts] from every £100 the government spends” by 2020. The second lever will be further detailed tomorrow but, beyond the fuel duty increase we mentioned above, tax on insurance premiums and banks are also on the agenda. Mr. Osborne nonetheless proved his political instinct by softening the bitter pill with an announced reduction in income tax – the most visible and universal

Historical UK general government deficit as a percentage of GDP. Source: ONS.
Historical UK general government deficit as a percentage of GDP.
Source: ONS.

Secondly, the looming Brexit threat adds uncertainty to the state of the UK economy at least for the year to come. In the short-term, this uncertainty translates into deferred investment decisions (‘sit and wait’) and ties the hands of the Chancellor, who has been publicly urged by David Cameron not to do anything that could complicate the referendum campaign. This phenomenon would however become marginal if the country decided to leave the EU. In that case, there is little doubt that the road to a fiscal surplus would significantly steepen.


Lastly, this political stance is challengeable from an economic perspective. Central Banks have struggled to revive inflation despite injecting thousands of billions of pounds/euros/dollars in the economy. The result has been mixed to say the least – inflation in 2015 in the UK will end up close to 0% – and has conducted some economists to bring the notion of ‘helicopter dropback in the spotlight. This measure consists in giving money directly to households in an attempt to encourage private spending. This decision would be a sensible way for the ‘fiscal stimulus’ to reach individuals, given that, as accurately diagnosed by Joseph Stiglitz, banks prefer to leave cheap money sleeping on their accounts – even if it means paying for it – and that companies have benefited from the low interest rates to buy financial assets – including their own shares – instead of investing.

Are helicopter drops the ultimate solution? They could be, provided that households are confident in the future enough to spend part of this gift rather than piling cash in the bank. By putting ‘skin in the game’ itself, the State could facilitate individual decision-making by highlighting trustworthy investments. Higher taxes – leading to lower disposable income – and lower public spending both go in the other direction.

Unfortunately, as we see today, the political agenda is too much focused on short-term deficits to account for longer-term economic benefits. This difficult (and inefficient) trade-off could have been avoided, at least partly, if governments had been bold enough to implement structural cost-cutting reforms in good times. This has not been the case, as the chart below shows. Another thing to think about for the Maastricht Treaty advocates.

Correlation between UK GDP growth and UK budget deficit as % of GDP. Sources: ONS, World Bank.

To understand what will happen tomorrow you can watch the video below extracted from the UK Parliament website.

Update (16/03): The US banking industry body called for a rate rise yesterday, arguing that the key root cause of the current poor economic conditions was more the lack of business confidence than the availability of funding.