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...»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 Has the era of macro economic stability been replaced by a new phase of macro economic uncertainty, slower growth and a recovery constrained by debt?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
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.
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...»Broadband and economic growth
Investment in broadband capacity and speed has a strong impact on economic growth according to new research.
read more...»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.
Revision Presentation - Supply-Side Indicators for the UK Economy
This updated revision presentation should be really useful for colleagues and students addressing the crucial supply-side issues during revision for AS and A2 Economics…
read more...»Withdrawing the drugs
An excellent article in last week’s Economist magazine, which focuses on the difficult task of weaning the world economy off its fiscal and monetary stimulus. In recent years, Interest rates have plummeted, and budget deficits soared; whilst quantitative easing has come out the woodwork; but last week’s announcement that the Fed raised the discount rate in its first step of contractionary policy in quite some time as well as our own general election around the corner, where fiscal prudence is high on the agenda and it seems that the beginning of the next phase in economic policy has begun.
read more...»The Laffer Curve comes to life - 50% of nothing is nothing
Three linked articles in The Times today looks at the efforts HMRC is putting into chasing down top earners and ensuring that they pay the full amount of tax that they owe. The issue revolves around the definition of residency – those who are classified as non-resident and not ordinarily resident – and the way in which earnings both in the UK and worldwide are treated for tax reasons as a result. There is a team at the Revenue of about 500 staff who each investigate about ten wealthy individuals, and whose work apparently yielded £373m in tax revenues last year. Those who are being investigated can expect that their offshore trusts and companies in particular will be under scrutiny, using new computer systems and a budget of £1bn to carry out the enquiries. This appears to have been a successful initiative which has generated a far higher revenue from those higher earners – but the suggestion is that this close scrutiny will drive those individuals away from the UK so that their earnings are no longer eligible for UK tax. A number of comments within the article focus on accusations that the Revenue keeps changing their rules, which makes it impossible for wealthy UK individuals and foreign nationals coming to the UK to undertake ‘legitimate’ tax planning and comply with the rules.
read more...»Supply-side stimulus for the Chinese economy
A top-down programme to encourage bottom-up growth of entrepreneurship in China’s rural areas. We have become accustomed to the enormous size of infrastructure projects in China designed to maintain domestic demand and employment and sustain a minimum growth rate of 8 per cent. China’s investments in new factories and properties surged 67 percent last year to 15.2 trillion yuan, more than Russia’s gross domestic product.
This is another approach focusing on enterprise in rural areas. The Chinese Government has spent about $40 billion training people from the countryside to run their own business. The Government’s scheme provides free skills training, tax free loans of up to $8,000 and two years of support.
Utopia and the 21 hour working week
The authors of the New Economics Foundation’s report into the length of the working week have suggested that working hours should be limited to a maximum of 21 hours per week. But the unemployment data from the ONS last month shows that such a change is being imposed on thousands of workers whether they like it or not; part-time employment rose by 99,000 in the three months to November 2009, replacing most of the 113,000 full-time jobs lost over the same period.
read more...»Revision Presentation - A Question of Confidence
This new revision presentation examines the implications of changes in consumer and business confidence for the UK economy
Launch revision presentation on a Question of Confidence
Download printable slide handouts
Focus on the National Minimum Wage
This blog provides some updated links on the minimum wage - a government intervention in the labour market.
read more...»Over-investment in China
John Gapper’s blog in the Financial Times today focuses on the risks that come from excessive capital investment in the Chinese economy. Bloated by an ultra-low cost of capital, many heavy industries have boosted their capacity to enormous levels and then relied on double digit annual growth in exports to absorb this capacity and maintain output and jobs. But this excess investment has made China vulnerable to the world financial crisis (not least the slump in world trade) and it has been a key factor behind global trade imbalances and the rise of protectionism. Capital investment of up to 40% of GDP is a reflection of a deeply skewed development model and one that is unsustainable.
“The result is huge over-capacity in heavy industries that soak up excess capital, which was hidden until last year by strong export demand for steel and the other affected products. But it also makes Chinese industry vulnerable to shocks such as the financial crisis.The Chinese government itself accepts - at least in theory - the need to switch away from a pure reliance on exports to fuel growth, to boost domestic consumption and to make growth more balanced.”
More here - China’s over-investment is its Achilles’ heel
An FT editorial today develops the discussion and highlights the waste of scarce resources that occurs when investment is made in capacity that will probably never be used:
“At the end of 2008, China’s steel capacity was 660m tons against demand of 470m tons. This difference is much the same as the European Union’s total output. Yet, notes the report, “there are currently 58m tonnes of new capacity under construction in China”. To the extent that gross domestic product is driven by such absurd spending is a measure of waste, not of economic welfare.”
The rest of the editorial can be found here
George Magnus also writes on China in his piece in the Times
The permanent scars of recession
Chris Giles was on excellent form in this article in the Financial Times considering the economic fall-out from the recession. He looks at the causes of hysteresis effects arising from the recession - including a long term fall in employment rates, reduction in the size of the capital stock, a weaker pace of innovation and reductions in productivity.
“The emerging consensus - for the advanced world at least - is that they will be deep and long-lived. In its recent World Economic Outlook, the International Monetary Fund examined 88 historical banking crises between 1970 and 2002 and found, on average, that countries do not earn back all the lost ground after the recession slips into people’s memories. In its database, it found that seven years after a crisis, output had fallen by 10 per cent compared with the pre-crisis path. Economic growth generally returned to the pre-crisis rate, but the loss of output seems permanent.”
Economics of Government Subsidies - Teacher Presentation
This new AS economics revision presentation looks at the use of subsidies by government for producers and consumers.
Launch interactive presentation on Economics of Government Subsidies
Download pdf handout of slides
The great fiscal policy debate - this one will run and run….
Stephanie Flanders, the BBC Economics Editor, is assessing what might happen to fiscal policy after the election next year. She has produced reports for the BBC news which can be accessed from her Stephanomics blog, and produced a discussion piece which draws upon current opinion as well as historical evidence to predict the likely differences and similarities between the political parties. As she says, both parties would expect to announce tough budget plans if elected - and both would tend to delay most of the pain until 2011 or 2012, when the economy is more firmly on the mend. There is a nice historical piece about Geoffrey Howe’s tax raising budget in 1981, and a reference to the pro’s and con’s of Vince Cable’s proposal to raise revenue by a “mansion tax” on houses worth more than £1m - one problem being that there are rather fewer of those houses now than there were a few months ago.
Many A level students will be voting for the first time in this most important of elections, in which fiscal policy is surely going to be one of the hottest topics, and I would love to give them some of the elements of this discussion to evaluate as they prepare to be some of the better informed new generation of the electorate.
Deflation - Teacher Presentation
This new revision presentation examines the causes and effects of deflation and the possible economic policy responses.
Launch interactive presentation on deflation
Download pdf handout of presentation slides
Rwanda invests in connecting the young
A deeply encouraging and inspiring report from Rory Cellan Jones on the One Laptop per Child policy being rolled out in Rwanda - a policy that aims to equip 100,000 students with access to the internet. Are there more important priorities than building an IT infrastructure such as meeting people’s basic needs and wants? Or can technology transform the economy just fifteen years after the genocide?
UK broadband in the slow lane
The relatively slow speed of the average broadband connections for most UK businesses and households will act as a contsraint on future competitiveness and growth. This report from BBC news finds that a study of the global state of broadband has put the UK 25th out of 66 countries in terms of the quality and reach of its networks. Rory Cellan Jones follows up the report with his own observations
“Britain has done well in the first broadband wave, using a pretty efficient copper network and DSL technology to get homes across most of the country connected. But other countries are moving forward more rapidly to build next generation networks using cable and fibre-optics.”
Investment in broadband can have significant demand and supply-side effects - the real consequences of under-investment will become more painful and obvious as time goes on - but who should pay for the extra capital spending needed? Will the new broadband tax make any noticeable difference?
Human and social capital and pathways to prosperity
Tom Aedy picks an article by Michael Milken in the FT and focuses on the importance of human capital in a competitive global economy - Milken calls this the world’s most valuable asset.
read more...»Businesses call for youth jobs subsidy
High and rising youth unemployment is one of the most important economic and social policy issues of the day. The CBI has called for extra funding from the government for a youth jobs subsidy - a £2500 per head payment for businesses that offer apprenticeships. The aim is to widen access to apprenticeships and equip school and college leavers with extra skills to improve their human capital and occupational mobility. If the lobbying proves effective, this is a good example to use of an active-labour market policy whose objectives are firmly on the supply-side of the economy.
According to CBI Chairman Richard Lambert, ““Young people leaving education this summer face the toughest job market in a generation. We know from previous recessions that a lack of employment after leaving education can damage young peoples’ long-term prospects at a critical point as they move from education to the world of work.” Their 5-point programme for reducing youth unemployment is available here.
Given that the government was quick to introduce a £2000 car scrappage incentive (paid paid for by the motor industry) - it might make for interesting discussion in the classroom to weigh up the relative benefits and costs of using a similar pot of cash for a direct subsidy for consumers contrasted with an employment and training subsidy for employers. Who should pay for training? Why is the free-rider problem relevant here?
This Guardian article argues that “Apprenticeships are an out of date idea. The only reason that they are back on the agenda is because of the TV show.”
Taking the pulse around the UK economy - are the anti-virals working?
Here is a whole feast of reports about the current state of the UK economy from the BBC – albeit some of them quite unpalatable. On the day on which the Labour Force Survey shows the biggest quarterly rise in unemployment since records of the ILO measure began in 1971, the BBC has a survey that shows that two out of three people know someone who has lost their job due to the recession, and 40% fear losing their own job. The survey is part of their feature ‘Taking the Pulse around the UK’ which is being covered on TV, radio and the website today. As well as the survey there is a series of video reports; in one from a Northampton market where a fruit and vegetable trader says he has never worked so hard for so little, while a clothes stall owner says she has altered the clothing she sells, stocking cheaper goods than before, in order to survive. In another, Hugh Pym summarises key indicators about the state of the economy, and a third has Stephanie Flanders debating the state of the economy with herself. The set of reports are well worth browsing through, and following the links to related items.
Innovation - A Driving Dynamic for the Economy
Innovative products and processes are the lifeblood of a competitive economy. With attention focused on the likely depth and duration of an economic recession, across the country there are many businesses who have one eye fixed firmly on the recovery and on continuing to develop and test new products. This superb and spirit-lifting BBC video pays a visit to Cambridge Consultants a business that has enjoyed its best ever year during a year of recession - ideas and investment businesses that can gain access to the finance that remains available look well placed to reap the benefits of their innovations - always providing they can get the products to market.
The video features a ‘virtually waterless’ laundry washing machine prototype developed by Xeros. By saving up to 90% of water compared to conventional machines, the Xeros process has the potential to reduce the cost of washing whilst also dramatically cutting carbon emissions.
Q&A: What is the productivity gap?
The productivity gap is a phrase to describe a sustained difference in measured output per worker (or GDP per person employed) between one country and another.
read more...»Revision - Labour Market Failure (presentation)
Here is a revised streamed presentation on market failure in the labour market
read more...»Guy Hands heads for the islands
A very brief piece in The Times today reports that the new 50% tax rate for Britain’s top earners is starting to have its predicted effect, of persuading some of those top earners to take their income elsewhere. Guy Hands, owner of EMI and the Terrra Firma private equity company, is leaving the UK to move to Guernsey and take advantage of its lower ‘tax haven’ rates. This is a textbook response - supply-side fiscal policy would suggest that a reduction in tax rates will encourage entrepreneurs and high earners into a country. Many city analysts predicted that the opposite would happen as a result of the ten percent rise in the top rate of tax, and that is what appears to have happened.
Obama’s pledge on R&D
“I am here today to set this goal: we will devote more than 3% of our GDP to research and development,”
If Obama succeeds in his aim, the US economy will raise investment in research and development as a share of national income - AS students might consider some of the likely demand and supply-side effects of such an aim. A good article to use when teaching supply-side policies.
The UK of course is some distance below the US levels when it comes to research and development spending.
First hints of the brain drain effect
The government’s decision to increase the top rate of income tax from 40% to 50% is pure political opportunism from a party that has given up any realistic hope of power at the next election. Cue a chance to stick a few poorly aimed knives into the body of up and coming entrepreneurs for a measure that will raise a little extra revenue but which will also do huge long term damage to enterprise in the British economy. From next year anyone earning more than £150,000 a year will pay 50% income tax. The move replaced the 45% tax bracket threatened in the pre-budget report last November. Here are the first signs of a brain drain effect taking hold. And even more worrying is the threat of a brain blockade - as highly skilled people in industries such as technology, medicine, industrial research and so son may now shun coming to the UK in favour of competing locations. Those with a cushion of wealth are best placed to relocate, in a digital age the barriers to conducting business off-shore are so much lower. The Telegraph provides a handy guide for those searching for an atlas and airline timetable this weekend.
