Ireland waves goodbye to borrowing rules
I am writing an article for EconoMax on how governments in many EU countries will abandon formal fiscal rules for the time being in response to the challenges from the credit crunch. News came through today that Ireland - former celtic tiger economy and a nation with one of the highest per capita incomes in the twenty-seven member nations of the EU - has announced a huge rise in government borrowing. It will blow the existing fiscal stability pact rules out of the water.
Ireland’s government now expects to borrow around Euro 12 billion next year - equivalent to 6.5 per cent of gross domestic product. A series of large budget surpluses have disappeared into thin air. Public sector debt is set to rise from 25 per cent of GDP to 44 per cent next year.
One reason is the sharp rise in unemployment which is now at its highest level since 1999. Ireland was officially the first European Union economy to drop into recession during the current economic crisis.
Aspects of Nationalisation - Debt and Free Markets
The national debt is the accmulated outstanding borrowing of central and local government together with public corporations. One of the immediate effects of the bail outs for financial institutions is that the total national debt has climbed by tens of billions of pounds. If the full extent of the extra finance made available to support the partly-nationalised banks is taken up, then UK national debt might rise to 100% in the near future, an almost unprecedented position to be in during peace time. The last time that government sector debt exceeded fifty per cent of our GDP was in the late 1970s when the Callaghan Labour government was forced into a bout of emergency borrowing from the International Monetary Fund.
This Independent article looks at the position and how the debt will be financed.
This Financial Times editorial considers the role that government intervention can play in saving free market institutions.
In today’s Guardian, Ashley Seager considers how the crisis has affected Britain’s public finances
Guardian 2-page spread on government spending
Saturday’s Guardian carried a superb double-spread on government spending - a worthy poster for the classroom wall. Here is a link to the pdf file - it could well print out well on an A3 printer. Hat tip to my colleague Liam Maxwell for providing the link.
End tobacco smoking by 2025?
Could we end the smoking of tobacco in the Uk within a generation. On first glance it looks like one of those utterly grandiose targets that New Labour used to launch (and re-launch) such as abolishing Child Poverty by 2020. But this ultra-ambitious target comes from the Royal College of Physicians who argue that radical measures are needed to curb smoking. They argue that “The primary objective of regulation of smoked tobacco should be to make smoking and smoked tobacco products as unappealing, unattractive, unaffordable and unavailable as possible, as quickly as possible.”
The measures include:
Increase the tax on tobacco by 10% every year
License tobacco retailers and prohibit the sale of smoked tobacco in premises where children are admitted
Crack down on tobacco smuggling, and apply Class A drug penalties for tobacco smuggling and under-age sale
Encourage sale of low cost single day nicotine packs, available from any retail outlet
Permanently exempt medicinal nicotine from VAT
Provide free medicinal nicotine for all smokers on the NHS, not just those on a smoking cessation programme
What do you think?
Ending Tobacco Smoking in Britain is available here
Darling’s Tough Love
Alister Darling’s interview in the Times today was revealing on several different levels. First for confirming that the Treasury is actively looking at altering the government’s own fiscal rules in time for the Pre-Budget statement in November. Second that Darling did not appreciate the extent of the negative fall-out on the real economy from the credit crunch - a crunch which has now reached Crunch 2.0 as it moves from the financial sector to manufacturing and services. And third that, given the parlous state of the government’s own finances - this year will be a particularly difficult one and tough choices will have to be made on spending priorities
”“So every chancellor has to be conscious of the fact that there’s a balance to be struck between how much you can spend, and how much people will say, ‘OK, if you’ve another pound to spend, remember me as well.”
A classic example of opportunity cost to use when the new term starts in September.
The dreadful public borrowing figures are reported here: public borrowing surges
Fiscal Drag
Almost four million people now pay income tax on their earnings at forty per cent compared to just over two million when Gordon Brown became Chancellor. Hundreds of thousands of middle-income taxpayers are now paying some of their income at the top rate because income tax allowances have not risen as fast as wages over the last decade. This is known as fiscal drag. This tax year (2008-09), the basic Personal Allowance - or tax-free amount - is £5,435. Taxable income is charged at 20% for incomes between £1 to £36,000 and then at the top rate of 40% for any earned income above that. On average, higher rate taxpayers each contributed £22,400 to the government’s finances last year.
The Times covered Fiscal Drag in an article a few years ago ... still relevant today
EU plans cut in VAT for local ‘labour intensive services’
Caterers, care homes and constructin firms will be among those interested to hear that the BBC reports that the EU Commission has unveiled plans to allow EU states to lower VAT rates for local service businesses, including restaurants and builders. Currently the minimum standard rate of VAT in the EU is 15%, although there are many exemptions. This would be a good example to use when discussing the effects of VAT on market supply for different goods and services in the AS micro course. The Guardian reports that “Zero-rated goods, such as children’s clothes in Britain, will be unaffected.”
Manufacturing gets a boost from UK government investment
British manufacturing industry perennially appears to move from one recessionary period to another. But although the sector as a whole has shrunk as a share of GDP and employment, we still have some world class manufacturing businesses out there often engaged in high-knowledge and high-value production - competing on quality and craftsmanship rather than mass volume. The decision this week by the UK government to build two new huge aircraft carriers is an important shot in the arm for a number of UK manufacturing firms and this BBC report says that seven UK-based firms have won contracts totalling £91.5m to build parts for the new carriers.
Corus, based in Scunthorpe, will get £65m to provide steel whilst five other English firms, in Dorset, Greater Manchester, Surrey, Suffolk and Lancashire, will build products ranging from control towers to landing aids. Corus ofcourse is now owned by the Indian conglomerate Tata!
But a good example of how government capital spending can have potentially large multiplier effects if the initial contracts are given to domestic businesses.
The rest of the BBC article is here
Revision: The UK Budget Deficit
A revision note on government borrowing designed for AS and A2 economists.
Revision note
Revision_Government_Borrowing.pdf
Ricardo Rules OK?
This week’s newspaper headlines have been dominated by the £2.7 bn tax bribe (whoops .... tax adjustment) announced by the embattled Chancellor Alastair Darling to compensate for the fiasco over the abolition of the 10% starting rate of income tax. The FT this morning linked the economic effects of this tax cut to one of the most celebrated and controversial ideas of moden macroeconomics - Ricardian equivalence theory ..... how sexy does macroeconomics get!
read more...»Stabilising demand - will the tax rebate work?
It is an interesting case study in how to stabilise demand and output at a time when consumer confidence is declining and the domestic economy has been hit by a sharp negative shock emanating from the housing market. The fiscal rebates will soon be landing in the post boxes of millions of US households ... the key question is how much of a temporary stimulus will this provide for the economy? The Financial Times has a good article on this today.
“The difference depends on how much of the rebate package will be spent and how much will go on imported goods. It is also related to the time-frame over which it is spent, and whether this expenditure will, in turn, trigger knock-on spending ..... In effect the government will nationalise part of US household debt – socialising some of the costs of the economic downturn. In doing so it may reduce the risk of a sudden pull-back in spending by overstretched consumers, even if it does not actually boost spending by much. Analysts estimate anywhere from 20 per cent to 50 per cent of the rebates will be spent over a period of four to six months.”
The impact will depend on the marginal propensity to save and spend the extra income and also the marginal propensity to import goods and services. With a weaker dollar raising the prices imported products, perhaps the propensity to import might be a little lower at this key stage of the economic cycle? The tax rebate is also targeted at Americans on incomes below the top of the pay ladder - whose marginal propensity to spend might be expected to be higher than the super-rich.
According to ABC news:
“More than 130 million U.S. households are eligible for the checks. Individuals could get up to $600, couples up to $1,200 with an additional $300 per child. In total about $120 billion will be doled out over the next two months.”
The rest of the FT article is here
US economy awaits stimulation from Bush’s tax rebate (Guardian)
Revision: Bonds
This two page revision note is aimed at A2 economists and provides a bried overview of the bond market and a look at what has been happening to bond yields in the UK over the last twenty years or so.
read more...»Revision: Progressive and regressive taxes
A row has been brewing within the Labour Party about the decision by Gordon Brown when he was Chancellor – confirmed in the 2008 Budget – to scrap the 10 per cent ‘starting rate of income tax’ partly as a way of reducing the basic rate of income tax from 22% to 20% (from April 2008). One of the related issues to this is how the income tax system affects the final distribution of income in the UK and, in particular, the distinction between progressive and regressive taxes. This revision note is for AS and A2 students and considers amongst other ideas, the progressivity of the UK income tax system.
Revision note article
Revision_Progressive_Regressive_Taxation.pdf
Revision: The Tax Burden
This revision note for AS and A2 economists looks at changes in the overall burden of taxation in the UK and some of the economic consequences.
Getting personal regarding the rules?
If a fretful Gordon Brown was watching on Wednesday as the Bank of England unveiled its latest strategy for the British economy, the Prime Minister may well have wondered whether he might end up feeling much the same way over his decision last month to hand Mervyn King a second term as Governor of the Bank.
Mr King’s flinty and uncompromising message on Britain’s economic prospects was bleak enough to leave any occupant of No 10 wringing his hands over the likely evaporation of the country’s “feelgood factor”.
read more...»MP calls for tax-or-charity reform
How best to encourage a giving culture where more of us are incentivised to give a share of our income to good causes? The Labour MP Frank Field delivering the Allen Foundation Lecture has called for reforms to income tax so that the top income groups earning £150,000 or more would be given a choice - give some money to charity or face a 10 per cent tax surcharge. Field claims that the inspiration for his idea came from a conversation with Margaret Thatcher! The full text of his lecture is available here
read more...»Another cut in US interest rates
The United States Federal Reserve has once more moved to lower interest rates in an aggressive move to bolster confidence and demand in their flagging economy. This BBC news audio-visual clip looks at the immediate market reaction. Just about every macroeconomic policy lever is now being pulled in terms of monetary and fiscal policy and it will be fascinating to see what impact the loosening of macroeconomic policy has on the economy.
Ben Bernanke has indicated that he is prepared to cut rates even further if necessary, a stark contrast to the inactivity at the Bank of England. The fact is that the drivers of monetary policy decisions in the United States tend to err on the side of economic growth whereas the sober bankers on the Monetary Policy Committee take a sterner line on inflation risks. Whose side are you on?
read more...»
The rich are racing away
Despite rising taxes for people on high incomes, the super-rich continue to race away as the gap between the haves and the have-nots gets wider and wider. This is one of the findings of new research on inequality in the UK from the independent Institute for Fiscal Studies.
‘The incomes of the richest 0.1% of the population increased at an annual rate of 6.6% a year during Labour’s first five years in office. They then fell by 2.7% a year on average in 2002-03 and 2003-04. They picked up again in 2004-05, the last year for which we have data. But the subsequent strength of the stock market suggests that the growth in their incomes may have accelerated again over the past three years, increasing inequality further despite additional attempts by the Government to help the less well off. It remains to be seen what impact recent problems in the banking sector and financial markets will have.’
The richest 0.1 per cent of the British population could fit snugly into the City of Manchester stadium - there are around 47,000 people in this category and the entrance fee for membership of this elite group is a gross income in excess of £375,000 per year. Relative to all tax payers, people in the top echelon of the income distribution (they are overwhemingly male) have an income 31 times that of the average for the UK as a whole.
The average income per tax for the top 0.1 per cent of income earners is £780,000 of which around £275,000 is then paid in income tax - an average tax rate of 35 per cent. This can be compared to the tax burden of people on average incomes. In 2004–05, the IFS found that the average income tax payer had an annual income before tax of £24,769 in 2007–08 prices and paid just over £4,400 in income tax - an average rate of tax of 15.8 per cent.
The IFS study also finds that the gini coefficient - a measure of the scale of income and wealth inequality in a country - has started to increase again having fallen in the first five years of the Labour government.
‘After falling for three years, the Gini coefficient has been rising since 2003–04, and is now slightly higher (0.35 compared with 0.33) than when Labour came to power in 1996–97 – an increase that is statistically significant’‘
Source: Institute for Fiscal Studies
More details available from the IFS at http://www.ifs.org.uk/publications.php?publication_id=4108
Further reading:
Tutor2u revision presentation on poverty and inequality
Weath rise boosts unequal Britain (BBC)
