Australia divided on a mining super-tax
Windfall taxes are undeniably popular for politicians. On the pretext of “excess profits” there is always pressure for a government to tap the super-high profits of industries enjoying high profits on the back of high commodity prices and a fast growth of market demand. The Australian government plans a super tax on the profits of the Australian mining industry but it is facing huge opposition to the proposal. Are one-off taxes equitable and efficient? We have tried them before in the UK including windfall levies on north sea oil and gas companies, the banks and Gordon Brown’s infamous raid on the pension funds - but with very mixed results.
Paul Krugman at the LSE
This is a reprise of a blog posted last summer following Krugman’s talk at the LSE. So much of what he talked about remains relevant today especially the challenges facing macro-economic policy-makers when deflationary and debt dangers continue to lurk.
”“The central problem of depression-prevention has been solved, for all practical purposes.” Robert Lucas, 2003
In a world of depression economics many of the standard rules of economics no longer apply. The global economy remains in the grip of a sustained downturn, the duration of which might make Japan’s “lost decade” look favourable in comparison. And macro policy-makers are grappling with an infection that has proved highly resistant to the usual doses of anti-biotic. Despite a remarkable attempt at stimulating demand – through the acceptance of large fiscal deficits and the dual attack of conventional and unconventional monetary policy – things seems to getting worse albeit more slowly.
This seemed to me to be gist of the core message from the first of the Lionel Robbins lectures delivered by the 2008 Nobel Prize Winner for Economics, Professor Paul Krugman of Princeton speaking at the LSE this evening.
read more...»Finding new opportunities among the economic wreckage
I am reprising this blog entry from a year ago partly because Robert Frank is one of my teaching heroes. But also because his idea of a steeply progressive consumption tax continues to have such resonance today as we seek to find ways of re-balancing our economic systems away from excessive and often wasteful consumption towards saving and productive investment. Read on and you will find out about positional goods, status races and the case for taxing consumption more and saving less.
read more...»A selection of revision notes on fiscal policy
The handling of fiscal policy is one of the big macroeconomic issues of the year and one that is likely to dominate many AS and A2 macro essays in the exams this summer. Here is a selection of our recent blogs on aspects of fiscal policy during the last twelve months together with some brief revision notes on fiscal policy and its impact on the real economy.
read more...»AS Macro Revision: Policies to Control Inflation
This revision blog focuses on policies that can be used to control the rate of inflation. Our starting point is that inflation comes from more than one source. Rising prices are not simply the result of increasing aggregate demand but also from higher costs of production and the direct and indirect effects of changes in government policies. It is also important to note that many inflationary impulses come from outside the domestic economy - namely from external shocks in the global economic system - many of which an individual country has no control to change.
read more...»Blanchflower scathing on cuts
Blanchflower here criticises Osborne’s contractionary fiscal policy at a time when growth is still anaemic, emphasising the collapse of multiplier effects from government spending, but also the negative impact on employment, both in the public and private sector, at a time when the private sector is still recovering slowly from the recession. Whilst cutting in a recession is clearly against the Keynesian ethos, Blanchflower accuses the Conservatives of also only following ideology rather than common sense, at a time when the government is one of the few entities to still be able to spend right now. He says this, and while there are reasons why the fiscal outlook for the UK is different to Greece’s, it is the financial markets that will dictate whether the government is allowed to spend right now…
The cutting begins…
The first round of government spending cuts were announced earlier today amounting to £6.2 billion. Whilst this is not “austerity” of the sort that Greece has been talking about recently, they are genuine cuts, albeit further measures are still required to tackle the huge black hole in the public purse.
read more...»A2 Economics Revision - Data Description Revision on Fiscal Deficits
Here is another example of some macro-economic data that you might be asked to interpret in an A2 AQA data response exam paper
“Using the extract, identify two significant features of the changes in the fiscal balance for the USA and the UK over the period shown by the data” (5 marks)
read more...»Ireland’s GNP and the Debt Crisis
Despite well publicised attempts to tackle an alarmingly high fiscal deficit, Ireland still has a budget shortfall in excess of ten per cent of national income and a high accumulated national debt measured as a percentage of GDP. But the true situation may be much worse. Low corporate taxes encouraged sizeable inflows of FDI especially from North America, the result being that Ireland’s GDP is much larger than her GNP - a better measure of the national income generated by Irish-owned economic assets. Government borrowing measured against GNP is very large indeed. And Ireland along with countries such as Greece, Portugal and Spain is mired in the classic debt-growth trap - how can it achieve fiscal austerity when national output and real incomes are falling.
Simon Johnson is strong on this issue today - the dangers of sovereign debt
“Debt overhangs hurt growth for many reasons: business is nervous that taxes will go up in the near future, the cost of credit is high throughout society, and social turmoil looms because continued austere policies are needed to reduce the debt.”
Skeletons in the Fiscal Cupboard
The incoming government has announced the creation of an Office for Budget Responsibility - a 3 person committee headed up by Sir Alan Budd and given the task of providing independent economic forecasts for the Treasury as it prepares budget statements and other public spending reviews. This is quite an important step if not perhaps on the same scale of surprise and excitement as May 1997 when Gordon Brown surged into the Treasury and made the Bank of England independent!
read more...»A2 Economics Revision - Direct and Indirect Taxation
Decisions about which types of tax to use as a way of raising revenue raise questions about the roles and relative merits of the different UK taxes. Should we move further towards relying on indirect taxes or are direct taxes the best way of generating enough revenue to fund government spending and cutting the fiscal deficit.
read more...»AS / A2 Revision - Where Next for the UK Economy?
Students wanting to demonstrate up-to-date understanding of the UK economy should find this streamed revision presentation really useful. It was delivered by Geoff at our AS & A2 Economics workshops in London & Manchester. It provides a comprehensive coverage of recent developments in the UK economy and highlights some potential downsides and upsides as the economy attempts to sustain a recovery during 2010 and 2011. Has the era of macro economic stability been replaced by a new phase of macro economic uncertainty, slower growth and a recovery constrained by debt? Or are there grounds for being more optimistic about the near-term future for the British economy?
Revision Presentation on the UK Economy
AS Economics Revision - Managing the Economy
This is a streamed version of the presentation that supported the revision session undertaken by students at our workshops last week as they examined the issue of managing the economy during these unusual times.
Revision Presentation on Managing the Economy
read more...»A2 Economics Revision - From Budget surplus to deficit
Here is a suggested answer to this question: “Explain why a government budget might move from surplus to deficit” (15 marks)
From Junk to Triple A
Here is a useful ranking of sovereign debt ratings for many countries - updated as ratings change!
Top rated:
Australia AAA - STABLE
Austria AAA - STABLE
Canada AAA - STABLE
Denmark AAA - STABLE
Finland AAA - STABLE
all the way down to
Pakistan B- (STABLE)
Ukraine B- (POSITIVE)
Ecuador CCC+ (STABLE)
Contagion spreads…
After Greek’s junk status downgrade yesterday, as well as Portugal’s downgrade; S&P today downgraded one of the other PIIGS, Spain as the contagion effect takes hold… Last night’s (Wednesday) Newsnight discussed the potential contagion ( from 27 minutes).
With Spain’s economy making up 8.5% of the EU GDP, this downgrade has bigger consequences than Greece’s.
Could the UK be next?
Greek junk status timeline
This informative interactive graphic from the FT shows the rapid rise in Greek government yields over the past year, resulting in yesterday’s downgrade to junk status.
When S&P warns holders of Greek debt that they only had an “average chance” of between 30% and 50% of getting their money back in the event of a debt restructuring or default, its going to have consequences…
One result of going junk (or sub-investment grade…) is that many financial institutions (including pension funds) are not allowed to hold such investment instruments, which will lead to a big sell-off of these, causing the yields to rise further.
As the fears of contagion spread, Portugal was also downgraded and the Vix index, a measure of “fear” in the US stock market, rose by more than 30 per cent, its biggest one-day jump since the height of the financial crisis in October 2008.
The moves highlighted the potential that the Greek crisis – the result of too large a debt load and expectations that it may default or have to restructure that debt – could spread and have knock-on effects on the global economy.
In this month’s edition of Economax, there is an in-depth article on Greece’s fiscal crisis.
Detail of the “deepest spending cuts since the 1970’s”
Following on from Geoff’s blog below about recent IFS reports, their latest research released yesterday looks at the scant detail that the three main political parties have given of their plans for spending cuts and tax rises, if elected. This could be introduced with this video of writer Will Self, who reckons the parties are in denial about the real challenges which face them after the election, and the IFS report adds the numbers to this suggestion.
read more...»Links to recent IFS Research
The Institute for Fiscal Studies occupies a lofty place in any coverage of the fiscal crisis facing the British economy. Their independent research is frequently quoted and the fiscal plans of the three main parties are scrutinised in the context of the dispassionate analysis that the IFS brings to bear. Some seriously good economists have cut their teeth at the IFS before moving onto other things. Here is the link to the recent research publications from the IFS. Among the various election and budget reports there are some good documents on what has happened to productivity during the recession and an analysis of what has happened to poverty during the 13 years of the Labour government.
Issues and Prospects for the UK Economy in 2010
Here are some notes from a presentation on some current issues affecting the UK economy - suitable I hope for AS and A2 macroeconomics courses and students preparing for their June 2010 papers.
We will make the full presentation available late and this blog post links to many of our other recent blogs on UK and global macroeconomic issues.
read more...»Bonds
Both companies and governments can issue bonds when they need to borrow money. The issue of new government debt is done by the central bank and involves selling debt to capital markets. The bond market is also the place where companies may seek to raise funds by issuing new tranches of debt.
read more...»CEP analysis of the UK economy
On the day that weak economic growth data was released by the Statistics Commission, a hat tip to Romesh Vaitilingam for sending through details of the new CEP election analysis briefing. The latest CEP Election Analysis describes where we are now in terms of macroeconomic performance and the impact on the public finances – and the policy options, focusing on debt reduction and economic recovery, and comparing the parties’ positions. It can be downloaded here.
PIIGS
Excellent interactive graphic from The Economist on the vital statistics of the PIIGS economies.
Super-fast broadband slows down again
Figures comparing growth in UK productivity consistently show us falling behind our major competitors. As Geoff highlighted in this recent blog, there are many underlying factors on the supply-side of the economy and one of them is infrastructure bottlenecks caused by, among other things, slow broadband speeds.
read more...»Stephen King on connections between monetary and fiscal policy
Monetary and fiscal policy may be two separate topics in the published AS and A2 economic syllabus but any smart student knows that there are many connections between the two.
read more...»50% top rate tax comes into force
The start of the new financial year heralds the launch of a new top rate of income tax of 50% for people with taxable incomes in excess of £150,000. This makes the income tax system more progressive at the top end but the move has attracted criticism from some business groups who claim that it will stifle enterprise and risk-taking in the economy and rise a brain drain effect. Will it lead to higher tax revenues or perhaps encourage greater tax avoidance and evasion?
Here are some links on the issue:
*BBC: New top-rate tax rate of 50% comes into force
*The Times: Millions prepare to count the cost of new tax regime
*Daily Mail: 50p tax increase could hit UK sporting events
*Joe Lynam provides this BBC news video report
Ask the Chancellors debate
If you missed the live election debate between the Chancellors, you can watch it here on Channel4OD; or read a review of it at the FT here.
Economics graphics from the Budget
A hat tip to Mark Seccombe for sending through this snappy selection of macroeconomics graphics linked to last week’s budget
1/ A good graphic to show how the government intend to reduce the debt (Guardian Data Blog)
2/ An interactive breakdown of government revenues and expenditure
3/ BBC editors’ comment (including comments from Stephanie Flanders)
4/ Times analysis - not only the measures introduced but also a bit of comment about some of them
UK Economy in 2010 - Essential Revision Presentation
Many thanks to Geoff for producing this superb 51-slide analysis and evaluation of the prospects for the UK Economy in 2010. Updated to 25 March 2010 with the latest available data.
read more...»Erotic economics
We’ve seen various attempts at tax avoidance before, with the likes of the big debate about whether Jaffa cakes are truly biscuits or cakes , but today another “interesting” example appeared in the news here.
The Erotic Cinema in Belgium claimed it should benefit from the reduced 6% rate of VAT (instead of the normal 21%) paid by cinema owners, who get a discount under law to promote cultural activities. Perhaps unsurprisingly, it was rejected by the ECJ!
