Recent Economy Articles
The Chancellor has long been keen to tell us that “the economy is healing” and, according to the latest Bank of England forecasts, he might finally have some justification in saying this. At his press conference last week the Sir Mervyn King was able to revise up growth forecasts for the first time since the financial crisis hit.
The Bank now expects growth in 2013 to come in around the 1.2% mark, an upward revision from the 1.0% it expected in February and twice as high as the OBR’s own estimate of 0.6%.
Presented with this information, one response is to hail ‘Good news Britain’ and point out that the Bank now expects a recovery twice as fast as the OBR.
Another, and I would argue more correct response, is to note that whilst growth of 1.2% is obviously preferable to growth of 0.6% it is nothing to shout about.
Indeed the OBR expected growth of 1.2% in 2013 as recently as last December. The initial OBR forecast for 2013, on which the Government’s fiscal plans were based, was for growth of 2.9%. No one now thinks 2.9% growth in 2013 is remotely plausible.
The economy might be healing in as much as it is showing some tentative signs of growth but whether compared to the original forecasts, to international experience or to the UK’s own history this is an appallingly weak recovery.
As I noted a few weeks ago, on the IMF’s forecasts (as good as any) the UK is set to experience a lost decade of GDP per capita growth. This is not what a ‘healing economy’ looks like.
Real wages have fallen by a huge 8.5% over the past three years.
Even leaving aside inflation, nominal earnings have been falling since last summer. And, as James Plunkett notes on twitter, the level of people in employment has dropped since the end of 2012.
It is an odd recovery indeed that is accompanied by falling employment and falling incomes and it is even odder that anyone can look at the UK data and see much to celebrate.
So, if the labour market is stagnant and real incomes are squeezed, where is this modest recovery coming from?
One answer can be found in the housing market where prices are once again rising.
The early indications are that the Chancellor’s interventions in the housing market are starting to bear fruit, prices are heading north and activity is picking up.
The real worry now is that the Government’s housing interventions (that push up prices not building) will mean we get an increase in growth funded by yet more household debt.
Some will no doubt argue that a few years of faster growth are a better out turn than stagnation. Whilst this is true we shouldn’t kid ourselves that an asset price, consumer debt led recovery is a good, or sustainable, outcome.
A longer version of this post is here.
It’s fair to say George Osborne has never been the Financial Transaction Tax’s biggest fan. As 11 European countries agreed a 0.01%-0.1% tax on shares, bonds and derivatives that will raise an estimated £30bn each year, he made clear that Britain was folding its arms, stamping its foot and refusing to join in.
It’s one thing to dismiss billions in additional revenue, side with your friends in the City and plump instead for the harshest programme of austerity since WWII.
But, clearly feeling his priorities were still not perverse enough, the Chancellor then launched a legal challenge against the European’s proposal, arguing it would be bad for his friends in the City.
George Osborne protested that European’s choosing to tax their financial institutions and their financial products may impact on other countries. Except that is precisely how our own stamp duty on shares works. Of the £3bn this FTT raises the UK Exchequer each year, around 40% of revenue comes from overseas.
In the face of such hypocrisy the Robin Hood Tax campaign launched a petition calling on Osborne to drop the legal challenge.
Over 15,000 people emailed the Treasury, who blocked the emails. We’ll be taking the petition by hand to the Treasury to ensure they get the message.
There have been almost daily attacks against the Financial Transaction Tax in the right of centre press as well, backed up by a slew of ‘reports’ commissioned by the financial sector. We’re taking this as a good sign.
One of the only concrete proposals to emerge post-crisis to ensure ordinary people do not pay for the economic mess is on the verge of becoming reality.
The shame is that Osborne’s opposition means the UK public will miss out on the benefits. Wild-eyed proclamations of the financial sector aside, this proposal is moderate. FTTs already exist not only in the UK, but around the world. Collectively they raise around £25bn a year. They have been implemented by governments of all political hues and in key financial centres such as Hong Kong, South Africa and Brazil.
As the government goes into overdrive to weaken the proposal, so it’s now more than ever they need reminding – the interests of the financial sector do not equate to the interests of society as a whole.
Simon works for the Robin Hood Tax Campaign
The past two weeks have provided some good and some bad news on the UK economy. On the one hand GDP data for Q1 2013 was better than expected.
Whilst on the other GDP per capita figures suggested that the hole we are currently in is much bigger than previously thought.
GDP per capita measures economic output per person. In many ways this is the most sensible way to measure growth over the medium term and the best way to compare growth across nations.
As the IMF mission arrives in the UK to assess our economic performance, the TUC have used IMF data to look at GDP per capita over the advanced economies.
As can be seen in the table below the UK’s performance is abysmal.
Over the decade 2008 to 2017 the UK will experience, according to the most recent IMF forecasts, GDP per capita growth of 0.0%.
In real terms GDP per capita was £23,777.32p in 2008; by 2017 it will have reached just £23,768.25p. In terms of growth per head the UK is set to have its own ‘lost decade’.
The data really tells us three things.
First that the UK experienced an especially severe recession in 2008/09, second that the recovery has been historically weak and drawn out and thirdly that in terms of the ‘global race’ that the government is so keen to talk about, we are doing especially badly. Amongst the G7 only Italy is expected to underperform the UK.
If there is a global race, then we are certainly losing.
The Resolution Foundation has calculated that median real wages are set to be well below 2008 levels in 2017. In fact real median wages are set to be below 1999 levels as late as 2017.
We face a lost decade of growth and two lost decades of living standards, we are losing the global race, deficit reduction is widely off track and yet the Chancellor still refuses to change course.
A longer version is at Touchstone blog
by Mike Giles
Tomorrow the Tory-led government’s fourth Queens Speech is being formally announced, and it appears they are adopting a more right-wing approach.
Out are policies on helping the world’s poorest (commitment to spend 0.7% of government income on overseas aid), on reducing the number of deaths from drinking (minimum alcohol pricing), on cutting the number of new young smokers (cigarette packet branding) and on ensuring safety in the workplace (new exemptions for employers from health and safety rules).
Instead, expect policies to ‘toughen up’ on social security and immigration, in addition to appeals to traditional Tory voters such as the elderly with increases to social care and pensions spending.
Labour must not stand on the sidelines while this Coalition circus continues. A major part of this involves developing new ideas which will feed into Jon Cruddas’ policy review and form part of the next manifesto.
An alternative Queens Speech focussed on the economy has already been trailed by Ed Miliband, and much of this is positive – such as introducing a Mansion Tax on homes over £2 million; giving communities the power to reject certain shops from their high streets; and greater help to households with their energy bills.
Our new pamphlet ‘One Nation, One World’, which has been launched today offers some ideas. Here are five of the recommendations:
1) The Council Tax regime is becoming increasingly discredited and often hits the poorest hardest (particularly following the 10% funding cut from the Coalition government). Henry Law of the Land Value Taxation Campaign argues that introducing a Land Value Tax can reduce costs for average families and improve the economy.
2) Prisoner re-offending is far too high and the system itself plays a part in this. While the Justice Secretary focuses on gimmicks such as restricting television in prison, Dave Nicholson of Ex-Cell argues that we need a system of ‘prisoner-led cooperatives’ which encourage work behind bars. Such an approach has already proved successful in rehabilitating offenders in Italy.
3) The criminal justice system is costly and ineffective and a different approach is required to tackle low-level crime. Roma Hooper of Make Justice Work says that an approach where the default punishment is work in the community, rather than jail, can significantly cut costs, improve local communities and effectively punish those committing crime.
4) Social mobility is worsening as the gap between richest and poorest continues to widen. Labour activist Daniel Blythe says that a social security system which improves the life chances of disadvantaged children by paying one of their parents the minimum wage to stay at home to care for them can achieve greater social mobility.
5) The costs of using trains and buses are incredibly high and prices continue to rise above inflation every year. Martin Mayer of Unite believes that a genuine move to renationalisation of public transport can reduce the government subsidy of private transport companies and cut costs for consumers.
The pamphlet contains 14 policy proposals, including from Pamela Nash MP. The recommendations include ideas to reduce the harm caused by illegal drugs, to genuinely help the world’s poorest, and to give British people a decisive say in how the country is run.
Please see www.revolutionise.it for more details.
In this respect, UKIP's success demonstrates not the weakness of the ruling class, but the exact opposite – its complete victory.
I don't just mean this in the sense that political power is held in the hands of such a narrow group that the Dulwich-educated son of a stockbroker can present himself as an outsider.
- The demand for tougher border controls is a call for an increase in the power of the state.
- Whilst its possible that immigration control might be very slightly positive for low-wage workers, it would be bad for average wage-earners, and there are many better ways of improving the lot of unskilled workers.
- Hostility to gay marriage is fundamentally anti-liberty, as it asserts the power of the state to intervene in private relationships.
- The call for a flat rate 25% tax would be a big tax cut for the rich.
- The demand that welfare recipients do compulsory workfare and not buy cigarettes or alcohol would be a reduction in the welfare state safety net, to the detriment not just of actual recipients but also to those in insecure jobs who fear becoming jobless.
UKIP's policies, then, do not challenge either the power of capital over worker or (what is a similar but distinct thing) the power of managerialists.
This is why I say their support represents the victory of the ruling class, because it demonstrates their complete power. I'm thinking here of Steven Lukes' "third dimension" of power:
Is it not the supreme exercise of power to get another or others to have the desires you want them to have – that is, to secure their compliance by controlling their thoughts and desires?…Is it not the supreme and most insidious use of power to prevent people, to whatever degree, from having grievances by shaping their perceptions, cognitions and preferences in such a way that they accept their role in the existing order of things? (Power: a radical view, 2nd ed, p27, 28)
It's in this sense that the ruling class has triumphed. The discontent that people might reasonably feel against bankers, capitalists and managerialists has been diverted into a hostility towards immigrants and the three main parties, and to the benefit of yet another party with a managerialist and pro-capitalist ideology. In this way, even "protest" votes help sustain existing class and power structures.
Author and all-round troll Niall Ferguson told an audience of financial advisors and and investors that Keynesian economics was flawed because the British economist didn’t care about future generations as he was gay and wasn’t planning to have children.
According to Financial Advisor magazine, he asked the Tenth Annual Altegris Conference in California how many children John Maynard Keynes had.
He then told audience members Keynes had none because he was gay, and married to a ballerina, with whom he likely talked of “poetry” rather than had children.
Ferguson was responding to a question about Keynes’ famous philosophy of self-interest versus the economic philosophy of Edmund Burke, who believed there was a social contract among the living, as well as the dead.
The implication is that Keynesian (which prioritises growth over reducing debt in the short term), doesn’t care about the accumulation of national debt, and therefore the future. Of course, it’s ecnomically nonsensical too since Keynesian favours reducing debt when the economy is doing well rather than being in a recession.
According to Financial Advisor magazine the audience went quiet at his remark, and some attendees later said they found the remarks offensive.
Ferguson to McCulley: Keynes didn’t care about the long-run ‘cause he was a homosexual, had no children. #AltegrisSIC2013
— Dan Jamieson (@dvjamieson) May 2, 2013
But that’s not all of it.
Ferguson, who is the Laurence A. Tisch Professor of History at Harvard University, and author of The Great Degeneration: How Institutions Decay and Economies Die, says it’s only logical that Keynes would take this selfish worldview because he was an “effete” member of society. Apparently, in Ferguson’s world, if you are gay or childless, you cannot care about future generations nor society.
It also implies that gays are responsible for the increase in global debt recently because they don’t care for the future.
FA magazine adds:
Throughout his remarks, Ferguson referred to his “friends” in high places. They should all be embarrassed and ashamed of such a connection to such small-minded thinking. Ferguson says U.S. laws and institutions have become degenerate. Rather, I dare say, it’s Ferguson’s arguments which are.
Even that is being too generous.
To reiterate point I made last night: Ferguson’s repulsive remarks about Keynes also likely directed at childless Keynesian, Paul Krugman.
— Richard Yeselson (@yeselson) May 4, 2013
UPDATE 2: Ferguson has now apologised
Move them to the first world. There’s your one sentence answer, but if brevity’s not your thing stick with me.
Obviously, calling for workers globally to have the same safety standards, and yesterday, isn’t a serious proposal. I’d put the “globally unified workplace health and safety” in the same category as “open borders” something that isn’t going to happen, but something useful to endorse and promote because it moves the overton window.
But you rarely find people advocating open borders as a solution to the world’s problems. You even get general good eggs like Martin Wolf arguing the concerns of foreigners should be afforded zero weight when deciding policy at the national level. This is despite the fact that open borders solves most of the world’s problems.
First of all, Bangladesh. Last month’s factory collapse is a tragedy, an ongoing tragedy. While you’ve forgotten about it and moved on with ECB rate cuts or whatever families are still seeing their relatives’ bodies being pulled from the wreckage, last hopes of survivors being rescued evaporating.
Why would workers put up with such awful conditions? This isn’t, as Matt and Tim argue, that this is their choice and a rational decision, that a life is worth less here than there. The reasons workers suffer under such conditions is because they don’t have another choice. But a set of choices isn’t neutral or natural, it is created.
What creates those conditions? Well at one level grinding rural poverty creates those conditions. As Matt Yglesias points out in a better post, Bangladesh now is poorer than the US was at a comparative level of development. In the US American workers could escape to the (stolen) countryside and set up their own homestead. This practice and the threat of leaving has meant that the US has pretty much always been a high wage country.
This “exit” option is denied to Bangladeshis now. Not because their rural population is high and productivity is poor, as Yglesias implies. Who wants to move to the Bangladeshi countryside other than douchebags on their gap yah? Bangladeshi wages, living conditions, safety standards are held down by immigration controls.
In the 18th and 19th century the threat of exit boosted American workers’ wages whether they left or not. The same is true today. In Lithuania the wages of those left behind by emigrants rose in response as (specifically single male) workers became more likely to leave. Contrary to popular opinion, a world of open borders gives the workers bargaining power. The threat of exit is important and works. Hundreds of years of history proves it.
I said earlier “move them to the first world”, but that’s too simple. I meant “let some of them move to the first world and they’ll do fine, but the conditions of those left behind will also improve because their threats finally become credible.” Those textiles workers weren’t slaves, but they weren’t free either. Free people don’t make the choice they had to, to go to work that day.
Photo by Photo taken by Sharat Chowdhury. Used under terms and conditions of creative commons license.
I wrote earlier the Tories were not serious about cutting the social security bill because they ignored two major components: lack of well-paying jobs and the large proportion we spend on pensions (plus there’s housing benefit, which I missed out)
I’m not expecting to win any popularity contests, but I’ll say it anyway: I think Labour should commit to cutting benefits for wealthier pensioners in the form of the Winter Fuel Allowance,
Freedom passes subsidised travel and free TV licenses. The definition of ‘wealthier’ is key, because I genuinely mean wealthy people not struggling middle-class people. I.e., people who earn the top rate of tax or have over £500k in savings.
The main leftwing case against stripping these benefits is that it ‘undermines universalism’. I’ll focus on this here, and make the case for in another post.
Owen Jones argues it will “breed a middle-class that is furious about paying large chunks of tax; getting nothing back”. The Guardian’s John Harris also asked in Jan: ‘Who will speak up for the universal welfare state now?‘.
I used to believe this too, but I’ve changed my minds for several reasons.
First, there is no evidence for the view that these benefits keep up support for the universal principle.
Despite increasing the number of universal benefits in recent decades (especially during New Labour years) – support has still fallen.
What actually happens is people support those specific benefits they get, but don’t extend that support to across to other benefits or the idea of universalism.
Or to put it another way, people are far more discerning than we give them credit for. Handing out a Freedom Pass to a rich pensioner is not getting us support for unemployment benefits in return. I’d love to see the evidence but it’s just not there.
Secondly, the argument that we’re chipping away the welfare state by cutting these benefits is a bit odd, since New Labour introduced the Winter Fuel Allowance. There are other universal benefits that can be preserved and supported. There seems to be an element of knee-jerk defensiveness here that assumes all changes are a one-way street and no more universal benefits can ever be introduced in the future.
Thirdly, the universal state isn’t just about cash benefits, and we shouldn’t assume that will buy support. We need a different kind of a universalist social security system, one that focuses on health and social care, education and training, child care and early intervention, and reducing inequality in a more fundamental way.
These benefits are a sticking plaster – like charity. The broader aim for the left should be to re-structure the state to reduce inequality, not rely on small handouts to wealth pensioners in the hope it buys support for other policies.
This is the short case against preserving these benefits on the basis of universalism. So why should Labour get rid of them anyway? I’ll write that in another post.
I’m going to simplify this by posing some questions:
1) Where is the evidence that, in the UK, means-testing one kind of benefit reduces support for other benefits such as for unemployed people?
2) I’m for universal benefits. All I’ve said is that I’d like the focus on other kinds of benefits rather than cash hand-outs to rich pensioners. So why are people saying that means-testing these pensioner benefits will undermine universal social security?
Another update: I think Daniel Sage was trying to write a critique of my point but ends up reinforcing it. His graphs show that offering universal pensions leads to more support for pensions, but not more support for other kinds of benefits such as JSA.
There are two diverging views on the British economy, cutting across left-right divides, that not enough attention is paid to.
One is the optimists’ view. They say the UK economy is running well below trend. That is, it should have recovered after the initial recession and continued on an upward trajectory but, due to various reasons, has stagnated. This means there is now substantial spare capacity (aka high unemployment) in the British economy that is lying unused.
This is also called the output gap. The chart below makes the simplistic case.
From the FT Alphaville blog.
Broadly, most optimists also agree the UK needs a short-term jolt to the economy, but also major reform over the longer term to boost the economy. We have relied far too much on bubbles and speculation in the past to keep going. Chris Dillow outlined various supply-side socialism ideas that would fit the ‘major reform’ category.
But there are also the pessimists.
They say the crash permanently knocked out a substantial part of the UK’s capacity, which means we can’t actually grow all that much. This in turn means they think the state needs to be smaller permanently, as it can’t support previous spending levels. Some of them also think low growth is inevitable.
While the Labour leadership fall into the optimists camp, there is a danger most voters drift towards the negative end.
A poll in the Independent today says:
only one in five people expect to be better off in two years’ time.
Most of the media has already bought into this idea that Britain’s stagnation is inevitable, and there is nothing much even Labour could do in power. This ‘soft bigotry of low growth expectations’ has frustrated the hell out of Duncan Weldon.
UPDATE: Coincidentally, there’s YouGov polling out today that emphasises my point too:
By 46% – 19% people expect to worse off than today, rather than better off, by the time of the next election.
Less than half the public – 43% – think living standards will return to their pre-recession levels within the next five years (or ten years after the crisis erupted in 2008).
49% think that ‘whichever party was in government, they would be unable to alter this central fact’. Rather fewer, 38%, believe that ‘with the right government policies it would be possible for things to improve fairly quickly’.
The Labour party has to challenge this expectation forcefully now or there is a danger it becomes received wisdom. That would really hurt in 2015 because Labour voters could think that even if the party has nice ideas, those policies are simply not credible. Unlikely, you think? It actually happened to Ken Livingstone (many voters simply didn’t believe he could cut train fares).
The pessimism of the public, and convincing them that Labour has an alternative that would actually work, is likely their biggest challenge in 2015. It has to stop the national mood turning pessimistic.
Edit: I mistakenly used the wrong chart earlier. This has been corrected.
George Osborne’s recent budget day threat, that the government will no longer let tax avoiders ‘get away with it’ is unlikely to leave many quaking in their boots.
The coalition launched a consultation on the development of a General Anti-Avoidance Rule (GAAR) to tackle tax avoidance back in 2010.
In the intervening years, fears that a broad-spectrum GAAR might “erode the attractiveness of the UK’s tax regime” and undermine “sensible and responsible tax planning” have resulted in Osborne plumping for a watered-down ‘General Anti-Abuse Rule’.
Osborne doesn’t have to look far to see the scale of lost tax revenue through legal ‘tax-planning’. He could for instance look at the Conservative Party’s Millbank Tower landlords, David and Simon Reuben.
The Reuben brothers hold second place in the Forbes list of richest Britons, with a net worth of $10.5bn. They are long-time friends of the Conservatives, donating at least £563,290 to the party since 2008 via a spider’s web of companies. The biggest donor was ‘Investors in Private Capital Ltd’ which has coughed up £379,900 over the past five years. It turned over £37 million in 2011/12, and yet paid zero corporation tax.
Then there is Global Switch, the Reuben’s globe-spanning data centre company, which has former Conservative leader Michael Howard as a director. Global Switch turned over £133 million in 2011/12, but didn’t pay a penny in corporation tax. Other key Reuben Brothers’ companies such as Northern Racing, and Kirkglade Ltd have also managed avoid paying any corporation tax, despite multi-million pound turnovers.
How can this be? In the case of Global Switch, tens of millions of pounds of taxable profit vanishes from the balance sheets via huge loan interest payments to a fellow subsidiary undertaking based in the British Virgin Islands. A similar process occurs with Investors in Private Capital, with millions of pounds of interest paid to ‘TFB Mortgages Ltd’; a Reuben Brothers’ company registered in Ireland, with a British Virgin Islands parent company.
As a result of these ‘tax-efficient’ intra-group transactions, the Reuben Brothers legally get out of paying millions of pounds of corporation tax.
Their arrangements- and similar ones used by thousands of other rich individuals and companies in the UK- will almost certainly fall under the provision for ‘established practice’ in the new anti-abuse rule.
Tax Research UK estimate that the UK loses £25 billion a year in tax avoidance. This is revenue which could prevent further hardship for the millions of working families already struggling under austerity, and facing welfare cuts of £18 billion a year by 2015.
Osborne’s softly-softly approach to tax avoidance is more evidence if it where needed that the coalition is a government of the rich, for the rich, to the detriment of the rest of society.
Joe Cottrell-Boyce is a Policy Officer at the ICB’s Traveller’s Project
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