Petrol, tax, and the downward sloping demand curve.
Nearly every country has a tax on petrol, although the amount varies widely. And given that the landed price of petrol is quite similar (see the graph below), it can be seen what effect the tax has on quantity demanded. The results are very much in line what economic theory would predict and there are also clear implications for countries that want to reduce petrol consumption.
read more...»Unit 4 Macro: Economics of Fiscal Deficit Reduction
How far, how fast and in what way should the UK government seek to cut the annual budget deficit and improve the state of public sector finances? These questions continue to be at the centre of a fierce debate among economists.
read more...»Unit 4 Macro: UK Bond Yields Reach Record Lows
The yields on UK government issued bonds has been falling steadily in recent months and, as we turned into January 2012, the yield on ten year government debt edged below 2% - when the UK government continues to borrow eye-wateringly large sums, why are bond yields so low?
The yield on a bond is the income received from a fixed-interest bond, calculated as a percentage of the price paid for it. So a ten year bond bought for £10,000 and paying a fixed annual interest of £600 would offer a yield of £600 / £10,000 = 6.0% per annum.
If the market price of a bond rises - for example, it rises from £10,000 to £12,000, the fixed interest remains the same (£600) but the yield will fall. £600 / £12,000 expressed as a percentage = 5%.
read more...»Analysis of the Autumn Statement
AS level students who have studied AD, AS and macroeconomic equilibrium should be in a position to carry out an economic analysis of today’s Autumn Statement. Here is a suggested assignment, which borrows from the focus on ‘connectives’ in the Business Workshops this week to help to build a strong chain of argument.
read more...»Ten Things About Tax
Over a month ago I highlighted a resource from the guardian visualising where government spending had been allocated in the last financial year and these figures can be updated for the planned 2011-2012 spending through the HM Treasury website
read more...»Economist’s Interactive guide to government debt
Great interactive app form the Economist and very apt at time when levels of national debt are constraining economic policy choices and threatening the viability of the Eurozone
Unit 2 Macro: Analysing Government Spending Cuts
It is rare that a day would go by without you being able to find a news article on issues that affect the macro-economy; a good tip is to constantly think like an economist and analyse these issues as you may do in the exam.
read more...»The morality of taxation
Morally, does it matter how rich the rich are? Or should our real concern be how poor the poor are? There was a great edition of The Moral Maze on Radio 4 last night, with debate sparked by the growing lobby calling for the 50% rate of income tax to be cut. The programme is available on i-player here, and it is really worth spending 43 minutes to listen to it - perhaps as preparation for a classroom debate.
Apple is richer than the US Government!
Yes- it’s true! Read on to find out more about this incredible statistic.
read more...»What might happen on August 2nd?
Well- it’s the day the United States might go bankrupt! Read on to find out more and for links to some useful resources to aid a class discussion of this fascinating topic.
read more...»A2 Macro: Twin Deficits
Here is a revision note on the economics of twin deficits. Twin deficits refer to a situation where an economy is running both a fiscal deficit and also a deficit on the current account of the balance of payments. The revision note is available for download as a pdf file.
Twin_Deficits.pdf
AS Macro Key Term: Fiscal Austerity
Fiscal austerity is a term in common use in the media at the moment. It refers to decisions by a government to reduce the amount of government borrowing (i.e. cut the size of a fiscal deficit) over a period of years. Fiscal austerity normally involves a combination of measures including increases in the overall burden of taxation and cuts in either the real level or growth of government spending on state-provided goods and services.
Fiscal austerity is in the news in the UK because of the Coalition Government’s plans top eliminate the structural budget deficit over the course of the current Parliament. In their Coaltion document they claim that:
1/ We will accelerate the reduction of the structural budget deficit over the course of a Parliament
2/ The main burden of the budget deficit reduction will be from reduced spending rather than increased taxes.
AS Macro Key Term: Fiscal Deficit
The fiscal deficit (or the budget deficit) is the amount by which government spending on state provided goods & services, transfers and capital spending exceeds income from taxation. A fiscal deficit must be financed usually by the issue of new government debt. Data for the UK’s fiscal deficit is shown in the following charts. The UK Coalition government has set an ambitious (and controversial) target to eliminate the structural element of the fiscal deficit over the course of the next four years.
The first chart below tracks UK government borrowing as a share of GDP
read more...»Discrimination and distribution of income news resources
If you are nearing the end of an A2 microeconomics syllabus and looking for current resources to help with issues of distribution of income and discrimination, the BBC came up with a couple of helpful items yesterday.
read more...»Dambisa Moyo - How the West was Lost
Dambisa Moyo’s talk at the RSA available here focuses on some of the long term structural problems facing Western Economies in general and the USA in particular. She argues that there are three crucial ingredients in economic growth - better capital, the quantity and quality of the workforce plus improvements in productivity
read more...»
Timetric: Income Tax and VAT Revenues
Our latest Timetric chart shows the monthly tax revenues from Income Tax and VAT. Both are highly seasonal - there is a surge in income tax receipts in January because of self assessment payments. But they key is the underlying trend in tax revenues - can you spot what has been happening during the recession (which kicked in during 2008) and in the early stages of the recovery? Our Timetric chart is always updated so it will be interesting to see what happens to the flow of tax income from these two sources as the recovery (we hope) is sustained and in the wake of the rise in the standard rate of VAT to 20%.
read more...»A virtuous circle of recovery - Paul Krugman
A hat tip to Larry Spence for flagging up this super piece from Paul Krugamn in the New York Times. His focus is on the dynamics of an economic recovery and the risks of fiscal austerity tipping the US back into recession.
“As families have repaired their finances, they have increased their spending; as consumer demand has started to revive, businesses have become more willing to invest; and all this has led to an expanding economy, which further improves families’ financial situation…....... The clear and present danger to recovery, however, comes from politics — specifically, the demand from House Republicans that the government immediately slash spending on infant nutrition, disease control, clean water and more.”
More here on How to Kill a Recovery
read more...»Combining monetary and fiscal policy to curb inflation in China
Inflation is rising in China, and many of the reasons are the same as those given by Mervyn King for the rise in the UK - food prices are up 10.3% and the producer price index has risen to 6.6%, giving an annual inflation rate of 4.9% in January.
This is in spite of three interest rate rises in the last four months, and has brought about a further rise from 5.81% to 6.06% by the Central Bank.
The growth of the property owning middle class is recognised as having a role here - the National Bureau of Statistics also announced changes in how it calculates consumer price inflation.
In spite of the fact that there is still a huge proportion of the population who live on a very low income, and poor families spend up to half their incomes on food, housing has now been given a much larger share of the new consumer price index (CPI) basket, and food prices have been given less weight, it said.
read more...»Economics Q&A: Will the rise in VAT harm the UK’s economic performance?
On January 4th 2011, the standard rate of value added tax (VAT) jumped from 17.5% to 20%. For the first time, the UK VAT rate is now the same as the basic rate of income tax! Prime Minister David Cameron has stated publicly that the rise in VAT is likely to be permanent rather than temporary. The UK economy will thus have to adjust to this higher rate but what are some of the possible macroeconomic consequences?
read more...»Will we have to live with high unemployment?
Will many advanced economies have to live with a new semi-permanently higher level of unemployment as a consequence of the global financial crisis, economic slump and a period of fiscal austerity?
read more...»
Economics Q&A: Will the Government spending cuts affect inflation?
In early July 2010 Chancellor George Osborne announced a tough government spending review designed to cut the size of the UK’s structural budget deficit and bring down managed state sector spending as a share of GDP. The UK is not alone in introducing fiscal austerity measures and they have prompted fierce debate not least among economists about the likely impact on economic performance. The spending squeeze brings to an end more than a decade of strong real terms increases in state spending.
This question is really about causation and in this case we are asked to think about how the steep planned cuts in government spending may affect the annual rate of consumer price inflation in the next couple of years.
read more...»Background on Value Added Tax
On January 4th, 2011, VAT in the UK rises from 17.5% to 20.0%. This Guardian article provides some background on the history of direct and indirect taxes.
According to the FT
“Value added tax is an indirect consumption tax assessed on the value added to a product at each point in the cycle of production and distribution. It is a consumption tax because it is ultimately borne by the consumer, who pays a fixed percentage of the final sale price of a product. VAT is not collected in full from the final seller of the product. The seller deducts from its VAT liability the amount of tax it has paid to other VAT-registered business further up the chain. VAT is therefore collected fractionally from different businesses.”
The rise in VAT will add to the record level of petrol prices - petrol has both excise duty and VAT applied to the final price. This BBC article explains the impact
EU Economics: European Fiscal Austerity Measures
2009 and 2010 have been hugely difficult and painful years for many of the countries inside the currency union. A dangerous combination of deep recession, rising unemployment, a severe worsening of government finances, high public sector debts and the expectation that a period of fiscal austerity will hit living standards badly have all contributed to a sense of malaise for those countries that have entered monetary union.
read more...»Fix the Budget - US Style
A hat tip to Shani Hartley for spotting this fantastic resource from the New York Times. Readers are invited to survey a large number of policy options that might either control fiscal spending or raise extra tax revenues. Checking the boxes you prefer feeds through to deficit reduction and fiscal packages can be shared online. Here is the link.
Fiscal Reform - Tax Reform
An autumnal hat tip to Graham Watson for this recommendation. Here is a link to the Mirrlees Report, the biggest single review of the whole UK tax system in the past 30 years. It comes in two sections and was somewhat missed in the aftermath of the student unrest in London last week.
The unkindest cut of all?
Opportunity costs – can a local authority afford to spend £21,000 a year on keeping 3 public toilets open, when their budget has already been cut by £220,000 and they are expecting a further 27% cut, already announced in the spending review? My local council, Epsom and Ewell, has decided not, as they need the money in order to maintain other services, particularly personal care services to the elderly in the borough. But, in order to avoid the negative externalities that could be associated with removal of a quasi-public good like public conveniences, they are seeking some alternative provision for the ‘emergency needs’ that they were there for – they are negotiating with local businesses to allow the public use of their facilities. Now that sounds like an excellent example of improving capacity utilisation, combined with David Cameron’s Big Society!
Krugman attacks the coalition’s fiscal policies
Paul Krugman is currently on a speaking tour and he has used his column in the New York Times to lay into the coalition government’s fiscal plans - confirmed this week with the spending review. Winner of the 2008 Nobel Prize in Economics, Krugman’s strong Keynesian foundations rarely take long to surface and this article is no exception. “The best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it. So is Britain on the road to a lost decade such as that suffered by Japan? Keep reading as many articles as you can on the stimulus v fiscal consolidation debate for it lies at the heart of so much that is important in macroeconomic policy-making at the moment.
A million jobs at risk from spending cuts
Stephanie Flanders looks at the possible employment effects of the government’s spending plans focusing here in government investment spending in rail - where investment programmes can have a big impact on many local economies. Several of the leading business organisations are lobbying for capital spending to be maintained because weaknesses in infrastructure might seriously hamper the sustainability of any future recovery. With long term bond interest rates at almost record lows, the rates of return required for investment to pay its way seem to be fairly low.
Fiscal austerity: Next stop: Pensions
As the austerity measures continue, the next stop is the pensions tax relief being significantly reduced. It has been cut from £250,000 to £50,000 a year of tax-free saving (although 3 years allowances may be carried forward for a lump-sum investment). The predictaion is this will affect around 100,000 high earning pensioners only. Furthermore, there is now a maximum of £1.5 bn that can be tax-free over a lifetime.
The Treasury forecasts this will raise £4 bn a year, to reduce the fiscal deficit. Although Ronnie Ludwig, a partner at Saffery Champness, said the new policy would discriminate against entrepreneurs. “Because it is based on the model of regular income and regular pension contributions, it effectively discriminates against the self-employed or small business owners whose income patterns are more uneven,” he said.
More here…
Quangos can go
As the fiscal austerity measures continue, 192 quangos are to be axed, including the Film Council, the Audit Commission, Youth Justice Board for England and Wales, the Animal Welfare Advisory Committee and Cycling England.. 118 others will be merged, including the Competition Commission and the OFT. Whilst in the case of the latter, the overlap between the OFT and the commission has been arguably wasteful and confusing, so efficiency may improve, it isn’t clear where the significant savings are coming from since the OFT and the commission have a combined annual budget of well under £100m.
Quangos - “quasi-autonomous non-governmental organisations” - are arm’s-length bodies funded by Whitehall departments but not run by them. They are advisory bodies, consumer watchdogs or organisations carrying out public services.
Among those the list confirms will be retained are Acas, the Competition Appeals Tribunal, the Higher Education Funding Council for England, the Low Pay Commission, UK Trade International, the Charity Commission for England and Wales and the Committee on Standards in Public Life.
