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Posts Tagged ‘cost of living’

Basic Income: a step forward?

The UK benefits system is complex and this is just one reason why some people fall through the safety net. There are criticisms that it doesn’t reward work and doesn’t provide sufficient incentives to move off benefits and into work. One rather radical policy that has been discussed in numerous countries is the idea of a ‘Basic Income’.

The Basic Income or Citizen’s Income is a policy where individuals receive a regular payment from the government, essentially for doing nothing. The income is paid and aims to cover basic living costs and on top of this, individuals can then work, earn income and pay tax on it. Experiments of this policy are already in place and over the next few years, we may see many more being trialled and much discussion of the possibility of implementing this in the UK. We tend to be fairly risk averse when it comes to radical policies and so while we may see discussion of it in the UK, I imagine we’ll want to see the relative success of the policy in other countries first!

There are many variations of the scheme and lots of questions that need addressing. Will it encourage people to work more or less? Might it reduce the stigma of claiming benefits, if this is a basic income that everyone receives? Does it simplify the system and hence provide more people with a basic income thus targeting poverty?

Some proposals have this payment as a universal one – non means tested and not conditional on anything. Other proposals, including one in Finland, sees just the unemployed receive the benefit and appears to be a social experiment to see if such a policy discourages the unemployed from taking jobs. Traditionally individuals receive a benefit if they are out of work, but this benefit can be cut (in some cases quite substantially) if they begin to work. This creates a disincentive to supply labour. However, under the basic income scheme, those who moved into work would continue to receive the basic income payment and hence the disincentive effect is removed. The policy thus creates a basic level of economic security. As Howard Reed and Stewart Lansley argue, it would offer:

“…financial independence and freedom of choice for individuals between work and leisure, education and caring, while recognising the huge value of unpaid work”.

There isn’t universal support for this type of scheme and many remain very cautious about such a radical policy and how the incentives will work. Key questions focus around the marginal rate of income tax that might be needed to finance such a policy. Furthermore, there is discussion about the equity of the policy if it is universal and hence non means-tested.

In Switzerland, the policy was put to a public referendum and it was rejected, with 75% of voters voting against such a policy. However, with changes in the structure of economies and, in many countries, technological change increasingly leading to automation, some argue that such a system will help to protect people. Lord Skidelsky, Professor of Political Economy at Warwick University said:

“Credible estimates suggest it will be technically possible to automate between a quarter and a third of all current jobs in the western world within 20 years … It [Basic Income] would ensure the benefits of automation were shared by the many, not just the few.”

Basic Income or Citizen’s Income is certainly something we are likely to hear a lot about during 2017. Whether or not the time has come for implementation is another matter, but it’s a good idea now to look into both sides and the relative success of the upcoming trials around the world.

8 basic income experiments to watch out for in 2017 Business Insider, Chris Weller (24/1/17)
What is basic income? Basic Income Earth Network (January 2017)
Finland trials basic income for unemployed The Guardian, Jon Henley (3/1/17)
Howard Reed and Stewart Lansley, Universal Basic Income: An idea whose time has come? Citizen’s Income Trust (14/6/16)
Is the world ready for a guaranteed basic income? Freakonomics, Stephen Dubner (13/4/16)
France’s Benoit Hamon rouses Socialists with basic income plan BBC News, Lucy Williamson (24/1/17)
Universal basic income trials being considered in Scotland The Guardian, Libby Brooks (1/1/17)

Questions

  1. What is basic income?
  2. What are three advantages of this policy? If you can, try to use a diagram to explain why this is an advantage.
  3. What are three disadvantages of moving towards this type of policy?
  4. Why does the provision of benefits affect an individual’s labour supply decision?
  5. Do you think that income tax would have to rise in order to finance this policy? Do you think high income earners would be prepared to pay a higher rate of tax in order to receive the basic income?
  6. If the trials showed that the policy did create an incentive to work in countries like Finland, do you think the results would also occur in the UK?
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Insolvencies down – lessons learned?

Insolvencies in England and Wales have fallen to their lowest level since 2005, official records show. The Insolvency Service indicates that bankruptcy, individual voluntary arrangements and debt relief orders have fallen, with the largest and worst form of bankruptcy falling by 22.5 per cent compared to the same period in 2014. There has also been a fall in corporate insolvencies back to pre-crisis levels.

The British economy is recovering and despite an increase in consumer borrowing of £1.2 billion from February to March, which is the biggest since the onset of the credit crunch, the number of people in financial difficulty and living beyond their means has fallen. However, there are also suggestions that the number could begin to creep up in the future and we are still seeing a divide between the north and south of England in terms of the number of insolvencies.

There are many factors that could explain such a decline in insolvencies. Perhaps it is the growth in wages, in part due the recovery of the economy, which has enabled more people to forgo borrowing or enabled them to repay any loan more comfortably. Lower inflation has helped to reduce the cost of living, thereby increasing the available income to repay any loans. Interest rates have also remained low, thus cutting the cost of borrowing and the repayments due.

But, another factor may simply be that lending is now more closely regulated. Prior to the financial crisis, huge amounts of money were being lent out, often to those who had no chance of making the repayments. More stringent affordability checks by lenders may have a large part to play in reducing the number of insolvencies. President of R3, the insolvency practitioner body, Phillip Sykes said:

“It may be too early to draw conclusions but demand could be falling as a result of low interest rates, low inflation and tighter regulation. This trend is worth watching.”

Mark Sands, from Baker Tilly added to this, noting that fewer people were now in financial difficulty.

“As well as this, we are seeing lower levels of personal debt and fewer people borrowing outside of their means due to more stringent affordability checks by creditors.”

Whatever the main reason behind the data, it is certainly a positive indicator, perhaps of economic recovery, or that at least some have learned the lessons of the financial crisis. The following articles consider this topic.

Personal insolvencies fall to 10-year low Financial Times, James Pickford (1/5/15)
Personal insolvencies at lowest level since 2005 BBC News (29/4/15)
Personal insolvencies drop to lowest level in a decade The Guardian, Press Association (29/4/15)
Corporate insolvencies at lowest level since 2007 The Telegraph, Elizabeth Anderson (30/4/15)
Interview: R3 President Phillip Sykes Accountancy Age, Richard Crump (1/5/15)
North-South gap widens in personal insolvencies Independent, Ben Chu (27/4/15)
Insolvency rates show ‘stark’ north-south divide Financial Times, James Pickford (27/4/15)

Questions

  1. What is meant by insolvency?
  2. There are many factors that might explain why the number of insolvencies has fallen. Explain the economic theory behind a lower inflation rate and why this might have contributed to fewer insolvencies.
  3. How might lower interest rates affect both the number of personal and corporate insolvencies?
  4. Why has there been a growth in the north-south divide in terms of the number of insolvencies?
  5. Do you think this data does suggest that lessons have been learned from the Credit Crunch?
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The world’s highest minimum wage

We have had a minimum wage in the UK for well over a decade and one its key purposes was to boost the pay of the lowest paid workers and in doing so reduce the inequality gap. Rising inequality has been a concern for many countries across the world and not even the nations with the most comprehensive welfare states have been immune.

Switzerland, known for its banking sector, has been very democratic in its approach to pay, holding three referenda in recent years to give the Swiss public the chance to decide on pay. Imposing restrictions on the bonuses available to the bosses of the largest companies was backed in the first referendum, but in this latest vote, the world’s highest minimum wage has been rejected. The proposed wage is the equivalent of £15 per hour and it is the hourly wage which proponents argue is the wage needed to ensure workers can afford to ‘live a decent life’. However, prices in Switzerland are considerably higher than those in the UK and this wage translates to around £8.33 per hour in purchasing power parity terms, according to the OECD. In the UK, much debate has surrounded the question of a living wage and the impact that a significant increase in the NMW would have on firms. The concern in Switzerland has been of a similar nature.

With a higher wage, costs of production will inevitably rise and this is likely to lead to firms taking on fewer workers and perhaps moving towards a different mix of factors of production. With less workers being employed, unemployment would be likely to increase and it may be that the higher costs of production are passed onto consumers in the form of a higher price. One problem is that as prices rise, the real wage falls. Therefore, while advocates of this high minimum wage suggest that it would help to reduce the gap between rich and poor, the critics suggest that it may lead to higher unemployment and would actually harm the lowest paid workers. It appears that the Swiss population agreed with the critics, when 76% voted against the proposal. Cristina Gaggini, who is the Director of the Geneva Office of the Swiss Business Association said:

I think [it would have been] an own goal, for workers as well as for small companies in Switzerland … Studies show that a minimum wage can lead to much more unemployment and poverty than it helps people … And for very small companies it would be very problematic to afford such a high salary.

The proposal was made by Swiss Unions, given the high cost of living in Switzerland’s suggest cities. It was rejected by the Swiss Business Federation and government and this was then echoed by the overwhelming majority in the referendum. Switzerland has been found to be the most expensive place to live in the world and the wages paid are insufficient to provide a decent life, with many claiming benefits to support their earnings. The debate over the minimum wage and the living wage will continue in countries across the world, but for now the Swiss people have had their say. The following articles consider this issue.

Switzerland rejects world’s highest minimum wage BBC News (18/5/14)
Swiss voters reject plan to establish world’s highest minimum wage The Guardian, Julia Kollewe (18/5/14)
Swiss voters reject setting world’s highest minimum wage Wall Street Journal, Neil Maclucas (18/5/14)
Swiss voters reject world’s highest minimum wage, block fighter jets Reuters, Caroline Copley (18/5/14)
Switzerland votes on world’s highest minimum wage at £15 per hour Independent, Loulla-Mae Eleftheriou-Smith (18/5/14)
Swiss reject highest minimum wage in world Financial Times, James Shotter (18/5/14)
Swiss reject world’s highest minimum wage, jet purchase Bloomberg, Catherine Bosley (18/5/14)

Questions

  1. Using a demand and supply diagram, illustrate the impact of a national minimum wage being imposed.
  2. Using the diagram above, explain the impact on unemployment and evaluate the factors that determine the amount of unemployment created.
  3. Given what you know about the proposed Swiss minimum wage, how much of an impact on unemployment do you think there would be?
  4. Draw a diagram to show the effect on a firm’s costs of production of the national minimum wage. Explain how such costs may affect the prices consumers pay for goods and services.
  5. How is it possible that a higher minimum wage could actually lead to more inequality within a country?
  6. Is there a chance that a minimum wage could lead to inflation? What type would it be?
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Back to the target (almost)

The Consumer Prices index (CPI) measures the rate of inflation and in October, this rate fell to 2.2%, bringing inflation to its lowest level since September 2012. For many, this drop in inflation came as a surprise, but it brings the rate much closer to the Bank of England’s target and thus reduces the pressure on changing interest rates.

The CPI is calculated by calculating the weighted average price of a basket of goods and comparing how this price level changes from one month to the next. Between September and October prices across a range of markets fell, thus bringing inflation to its lowest level in many months. Transport prices fell by their largest amount since mid-2009, in part driven by fuel price cuts at the big supermarkets and this was also accompanied by falls in education costs and food. The Mail Online article linked below gives a breakdown of the sectors where the largest price falls have taken place. One thing that has not yet been included in the data is the impact of the price rises by the energy companies. The impact of his will obviously be to raise energy costs and hence we can expect to see an impact on the CPI in the coming months, once the price rises take effect.

With inflation coming back on target, pressures on the Bank of England to raise interest rates have been reduced. When inflation was above the target rate, there were concerns that the Bank of England would need to raise interest rates to cut aggregate demand and thus bring inflation down.

However, the adverse effect of this would be a potential decline in growth. With inflation falling to 2.2%, this pressure has been removed and hence interest rates can continue to remain at the record low, with the objective of stimulating the economy. Chris Williamson from Markit said:

The easing in the rate of inflation and underlying price pressures will provide greater scope for monetary policy to be kept looser for longer and thereby helping ensure a sustainable upturn in the economy … Lower inflation reduces the risk of the Bank of England having to hike rates earlier than it may otherwise prefer to, allowing policy to focus on stimulating growth rather than warding off rising inflationary pressures.

The lower rate of inflation also has good news for consumers and businesses. Wages remain flat and thus the reduction in the CPI is crucial for consumers, as it improves their purchasing power. As for businesses, a low inflation environment creates more certainty, as inflation tends to be more stable. Businesses are more able to invest with confidence, again benefiting the economy. Any further falls in the CPI would bring inflation back to its target level of 2% and then undoubtedly concerns will turn back to the spectre of deflation, though with the recent announcements in energy price rises, perhaps we’re getting a little ahead of ourselves! Though we only need to look to countries such as Spain and Sweden where prices are falling to realise that it is certainly a possibility. The following articles consider the data and the impact.

UK inflation falls in October: what the economists say The Guardian, Katie Allen (12/11/13)
British inflation hits 13-month low, easing pressure on central bank Reuters, David Milliken and William Schomberg (12/11/13)
UK inflation falls to 2.2% in October BBC News (1211/13)
UK inflation falls to 13-month low: reaction The Telegraph (12/11/13)
Fall in inflation to 2.2% welcome by government The Guardian, Katie Allen (12/11/13)
Inflation falls to lowest level for a year as supermarket petrol price war helps ease the squeeze on family finances Mail Online, Matt Chorley (12/11/13)
Inflation falls to its lowest level for more than a year as consumers benefit from petrol pump price war Independent, John-Paul Ford Rojas (12/11/13)
UK inflation slows to 2.2%, lowest level in a year Bloomberg, Scott Hamilton and Jennifer Ryan (12/11/13)
Are we facing deflation? Let’s not get carried away The Telegraph, Jeremy Warner (12/11/13)

Questions

  1. How is the CPI calculated?
  2. Use an AD/AS diagram to illustrate how prices have been brought back down. Is the reduction in inflation due to demand-side or supply-side factors?
  3. What are the benefits of low inflation?
  4. The Telegraph article mentions the possibility of deflation. What is deflation and why does it cause such concern?
  5. Explain why a fall in the rate of inflation eases pressure on the Bank of England.
  6. How does the rate of inflation affect the cost of living?
  7. Is a target rate of inflation a good idea?
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The cost of a living wage

Each year in November, the Living Wage Foundation publishes figures for the hourly living wage that is necessary for people to meet basic bills. The rate for London is calculated by the Greater London Authority and for the rest of the UK by the Centre for Research in Social Policy at Loughborough University.

The 2013 update was published on 4 November. The Living Wage was estimated to be £8.80 in London and £7.65 in the rest of the UK.

Two things need to be noted about the Living Wage rate. The first is that the figure is an average and thus does not take into account the circumstances of an individual household. Clearly households differ in terms of their size, the number of wage earners and dependants, the local costs of living, etc. Second, the figures have been reduced from what is regarded as the ‘reference’ living wage, which is estimated to be £9.08 outside London. The reason for this is that people earning higher incomes have seen their living standards squeezed since 2009, with prices rising faster than average post-tax-and-benefit wages. Thus, the Living Wage is capped to reflect the overall decline in living standards. As the Working Paper on rates outside London explains:

From 2012 onwards, two kinds of limit have been put on the amount that the Living Wage as applied can rise in any one year. The first limits the increase in the net income (after taxes and benefits) requirement for each household on which the living wage calculation is based, relative to the rise in net income that would be achieved by someone on average earnings. The second limits the increase in the living wage itself (representing gross income) relative to the increase in average earnings.

Nevertheless, despite this capping of the living wage, it is still significantly higher than the UK National Minimum Wage, which currently stands at £6.31 for those aged 21 and over. This can be seen from the chart (click here for a PowerPoint).

Paying the Living Wage is voluntary for employers, but as The Guardian reports:

A total of 432 employers are now signed up to the campaign, up from 78 this time last year, including Legal & General, KPMG, Barclays, Oxfam, Pearson, the National Portrait Gallery and First Transpennine Express, as well as many smaller businesses, charities and town halls. Together they employ more than 250,000 workers and also commit to roll out the living wage in their supply chain.

But as The Observer reports:

The number of people who are paid less than a ‘living wage’ has leapt by more than 400,000 in a year to over 5.2 million, amid mounting evidence that the economic recovery is failing to help millions of working families.

A report for the international tax and auditing firm KPMG also shows that nearly three-quarters of 18-to-21-year-olds now earn below this level – a voluntary rate of pay regarded as the minimum to meet the cost of living in the UK. The KPMG findings highlight difficulties for ministers as they try to beat back Labour’s claims of a “cost of living crisis”.

According to the report, women are disproportionately stuck on pay below the living wage rate, currently £8.55 in London and £7.45 elsewhere. Some 27% of women are not paid the living wage, compared with 16% of men. Part-time workers are also far more likely to receive low pay than full-time workers, with 43% paid below living-wage rates compared with 12% of full-timers.

But although paying a living wage may be desirable in terms of equity, many firms, especially in the leisure and retailing sectors, claim that they simply cannot afford to pay the living wage and, if they were forced to, would have to lay off workers.

The point they are making is that it is not economical to pay workers more than their marginal revenue product. But this raises the question of whether a higher wage would encourage people to work more efficiently. If it did, an efficiency wage may be above current rates for many firms. It also raises the question of whether productivity gains could be negotiated in exchange for paying workers a living wage

These arguments are discussed in the following podcast.

Podcast
Higher ‘productivity’ will increase living wage BBC Today Programme, Priya Kothari and Steve Davies (4/11/13)

Articles
UK living wage rises to £7.65 an hour The Guardian (4/11/13)
More than 5 million people in the UK are paid less than the living wage The Observer, Toby Helm (2/11/13)
Increasing numbers of Scots are paid less than living wage Herald Scotland (2/11/13)
Labour would give tax rebates to firms that pay living wage Independent, Jane Merrick (3/11/13)
Employers praise Ed Miliband’s living wage proposal Independent, Andy McSmith (3/11/13)
Miliband’s living wage tax break will raise prices, warns CBI chief The Telegraph, Tim Ross (3/11/13)
Living Wage rise provides a boost for low paid workers BBC News (4/11/13)

Information and Reports
What is the Living Wage? Living Wage Foundation
The Living Wage Centre for Research in Social Policy, Loughborough University
Living wage Mayor of London
One in five UK workers paid less than the Living Wage KPMG News Release (3/11/13)
Number of workers paid less than the Living Wage passes 5 million KPMG News Release (3/11/13)
Living Wage Research for KPMG Markit (October 2012)

Questions

  1. How is the Living Wage calculated?
  2. What are the reasons for announcing a Living Wage figure that is lower than a reference living wage? Assess these reasons.
  3. If there are two separate figures for the Living Wage for London and the rest of the UK, would it be better to work out a living wage for each part, or even location, of the UK?
  4. Why might it be in employers’ interests to pay at least the Living Wage? Does this explain why more and more employers are volunteering to pay it?
  5. Assess the Labour Party’s pledge, if they win the next election, that ‘firms which sign up to the living wage will receive a tax rebate of up to £1000 for every low-paid worker who gets a pay rise, funded by tax and national insurance revenue from the higher wages’.
  6. Which is fairer: to pay everyone at least the Living Wage or to use tax credits to redistribute incomes to low-income households?
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Good news and bad news on the labour market front

First the good news. Employment is rising and unemployment is falling. Both claimant count rates and Labour Force Survey rates are down. Compared with a year ago, employment is up 279,092 to 29,869,489; LFS unemployment is down from 7.87% to 7.69%; and the claimant count rate is down from 4.7% to 4.0%.

Now the bad news. Even though more people are in employment, real wages have fallen. In other words, nominal wages have risen less fast than prices. Since 2009, real wages have fallen by 7.6% and have continued to fall throughout this period. The first chart illustrates this. It shows average weekly wage rates in 2005 prices. (Click here for a PowerPoint of the chart.)

The fall in real wages is an average for the whole country. Many people, especially those on low incomes, have seen their real wages fall much faster than the average. For many there is a real ‘cost of living’ crisis.

But why have real wages fallen despite the rise in employment? The answer is that output per hour worked has declined. This is illustrated in the second chart, which compares UK output per worker with that of other G7 countries. UK productivity has fallen both absolutely and relative to other G7 countries, most of which have had higher rates of investment.

The falling productivity in the UK requires more people to be employed to produce the same level of output. Part of what seems to be happening is that many employers have been prepared to keep workers on in return for lower real wages, even if demand from their customers is falling. And many workers have been prepared to accept real wage cuts in return for keeping their jobs.

Another part of the explanation is that the jobs that have been created have been largely in low-skilled, low-wage sectors of the economy, such as retailing and other parts of the service sector.

But falling productivity is only part of the reason for falling real wages. The other part is rising prices. A number of factors have contributed to this. These include a depreciation of the exchange rate back in 2008, the effects of which took some time to filter through into higher prices in the shops; a large rise in various commodity prices; and a rise in VAT and various other administered prices.

So what is the answer to falling real wages? The articles below consider the problem and some of the possible policy alternatives.

Articles
Inflation, unemployment and UK ‘misery’ BBC News, Linda Yueh (16/10/13)
Employment is growing, but so are the wage slaves The Guardian, Larry Elliott (16/10/13)
Living standards – going down and, er, up BBC News, Nick Robinson (26/7/13)
Revealed: The cost of living is rising faster in the UK than anywhere in Europe, with soaring food and energy bills blamed Mail Online, Matt Chorley (16/10/13)
Cutting prices to raise living standards is just a waste of energy The Telegraph, Roger Bootle (6/10/13)
Downturn sees average real wages collapse to a record low Independent, Ben Chu (17/10/13)
Why living standards and public finances matter Financial Times, Gavin Kelly (29/9/13)
Social Mobility Tsar Alan Milburn Calls on Government to Boost Wages to End UK Child Poverty International Business Times, Ian Silvera (17/10/13)
Do incorrect employment growth figures explain low UK productivity? The Guardian, Katie Allen (23/10/13)

Data
Unemployment data ONS
Average Weekly Earnings dataset ONS
Consumer Prices Index ONS
International Comparison of Productivity ONS

Questions

  1. How are real wages measured?
  2. Why have real wage rates fallen in the UK since 2009?
  3. What factors should be included when measuring living standards?
  4. Why has employment risen and unemployment fallen over the past two years?
  5. What factors could lead to a rise in real wages in the future?
  6. What government policies could be adopted to raise real wages?
  7. Assess these policies in terms of their likely short-term success and long-term sustainability.
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Fuelling the Political Playing Field

The cost of living is a contentious issue and is likely to form a key part of the political debate for the next few years. This debate has been fuelled by the latest announcement by SSE of an average rise in consumer energy bills of 8.2%, meaning that an average dual-fuel customer would see its bill rise by £106. With this increase, the expectation is that the other big energy companies will follow suit with their own price rises.

Energy prices are made up of numerous factors, including wholesale prices, investment in infrastructure and innovation, together with government green energy taxes. SSE has put their price hike down to an increase in wholesale prices, but has also passed part of the blame onto the government by suggesting that the price hikes are required to offset the government’s energy taxes. Will Morris, from SSE said:

We’re sorry we have to do this…We’ve done as much as we could to keep prices down, but the reality is that buying wholesale energy in global markets, delivering it to customers’ homes, and government-imposed levies collected through bills – endorsed by all the major parties – all cost more than they did last year.

The price hike has been met with outrage from customers and the government and has provided Ed Miliband with further ammunition against the Coalition’s policies. However, even this announcement has yet to provide the support for Labour’s plans to freeze energy prices, as discussed in the blog Miliband’s freeze. Customers with other energy companies are likely to see similar price rises in the coming months, as SSE’s announcement is only the first of many. A key question is how will the country provide the funding for much needed investment in the energy sector? The funds of the government are certainly not going to be available to provide investment, so the job must pass to the energy companies and in turn the consumers. It is this that is given as a key reason for the price rises.

Investment in the energy infrastructure is essential for the British economy, especially given the lack of investment that we have seen over successive governments – both Labour and Conservative. Furthermore, the government’s green targets are essential and taxation is a key mechanism to meet them. Labour has been criticized for its plans to freeze energy prices, which may jeopardise these targets. The political playing field is always fraught with controversy and it seems that energy prices and thus the cost of living will remain at the centre of it for many months.

More energy price rises expected after SSE increase BBC News (10/10/13)
SSE retail boss blames government for energy price rise The Telegraph, Rebecca Clancy (10/10/13)
A better way to take the heat out of energy prices The Telegraph (11/10/13)
SSE energy price rise stokes political row Financial Times, John Aglionby and Guy Chazan (10/10/13)
Ed Miliband condemns ‘rip-off’ energy firms after SSE 8% price rise The Guardian, Terry Macalister, Angela Monaghan and Rowena Mason (28/9/12)
Coalition parties split over energy companies’ green obligations Independent, Nigel Morris (11/10/13)
Energy price rise: David Cameron defends green subsidies The Guardian, Rowena Mason (10/10/13)
‘Find better deals’ users urged as energy bills soar Daily Echo (11/10/13)
Energy Minister in row over cost of taxes Sky News (10/10/13)
SSE energy price rise ‘a bitter pill for customers’ The Guardian, Angela Monaghan (10/10/13)
Energy firm hikes prices, fuels political row Associated Press (10/10/13)
Only full-scale reform of our energy market will prevent endless price rises The Observer, Phillip Lee (27/10/13)

Questions

  1. In what market structure would you place the energy sector?
  2. Explain how green taxes push up energy bills? Use a diagram to support your answer.
  3. Consider the energy bill of an average household. Using your knowledge and the articles above, allocate the percentage of that bill that is derived from wholesale prices, green taxes, investment in infrastructure and any other factors. Which are the key factors that have risen, which has forced SSE (and others) to push up prices?
  4. Why is investment in energy infrastructure and new forms of fuel essential? How might such investment affect future prices?
  5. Why has Labour’s proposed 20-month price freeze been criticised?
  6. What has happened to energy prices over the past 20 years?
  7. Is there now a call for more government regulation in the energy sector to allay fears of rises in the cost of living adversely affecting the poorest households?
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A 3p delay?

Increases in the cost of living over the past few years have put many families under financial pressure. One of the main factors that has been hurting households is the price of petrol and diesel. Road fuel duty was due to be increased last August, but the Chancellor delayed it in June. However, a planned 3p rise in duty by the Coalition, which has faced rebellion from numerous MPs may now be delayed further, following a hint from the Treasury.

The government has said that it will do everything it can to support struggling families with the cost of living and this has led many to conclude that in the Autumn Statement, the Chancellor will delay the planned 3p rise. Labour was defeated in its efforts to force a delay of the proposed 3p duty rise, as Tory bankbenchers were given this hint that the Treasury would decide to delay the increase anyway. The Economic Secretary to the Treasury said that fuel duty is part of the government’s strategy to help cut the cost of living. He commented that fuel duty was 20% lower in real terms compared to March 2000, when it was at its peak.

If we had continued with the policies of the previous government, quite simply prices would be higher, fuel would be 10p more expensive per litre. I know some will call for a further freeze in fuel duty today. I can assure them this government understands the financial pressures hard-working families are facing. Subject to the constraints of the public finances, this government is determined to help families with the cost of living.

A key economic question to consider is why is fuel one of the products that is frequently taxed? When a tax is imposed on a product, its price will rise and as the law of demand tells us, this will cause people to purchase less of it. But, what is so special about petrol? Why do people continue to purchase petrol even when its price rises? The following articles consider the concerns surrounding the 3p fuel duty rise.

Treasury to defer planned increase in fuel duty The Guardian, Nicholas Watt (13/11/12)
Asda chief Andy Clarke urges scrapping fuel duty rise BBC News (15/11/12)
Fuel Duty: Labour to force vote to delay 3p rise The Guardian, Helene Mulholland (12/11/12)
Fuel duty delay called for by Which? BBC News (11/11/12)
Fuel Duty: Government may still axe increase Sky News (13/11/12)
Chancellor heads off fuel duty rebellion Financial Times, George Parker (12/11/12)
Osborne pressed to shelve fuel duty rise Financial Times, George Parker (8/11/12)
Planned 3p petrol increase could be abandonedThe Telegraph, Christopher Hope (11/11/12)

Questions

  1. Why is petrol a good that is taxed so heavily?
  2. Illustrate the impact of a tax on petrol using a demand and supply diagram. Explain what happens to the equilibrium price and quantity.
  3. Which factors will make the change in price and quantity relatively larger or smaller? Think about how elasticity is relevant here.
  4. What other factors have contributed towards the increased cost of living over the past few years?
  5. Which factors in particular would make a January rise in fuel duty especially painful for many families?
  6. What are the arguments both for and against delaying the 3p rise in duty?
  7. According to the Economic Secretary to the Treasury, fuel duty is 20% lower in real terms. What does this actually mean?
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TUC meet in Brighton

Trade union action has been a feature of the British labour market over the past few years, as discussed in this first and second blog. With the government’s austerity measures still in place and ongoing issues over pension provision, there are many explosive issues that will undoubtedly be discussed at this year’s TUC Conference in Brighton.

We have already heard from numerous unions that strike action over the coming year is ‘inevitable’. With rising prices, static or even falling wages, reduced pension provision and increased contributions, the cost of living has become increasingly unaffordable for many members of the trade unions. Dave Prentis, the General Secretary of Unison said:

‘I think people have been pushed into a corner. They are moving into poverty … The threat is that if we can’t move forward in negotiations to find a way through it then we will move to industrial action. There is no doubt whatsoever that we can create disputes throughout next year.’

Although few would argue against the notion that the government’s finances are in a dire state and spending cuts together with tax rises are needed, the controversy seems to lie in exactly when these cuts should take place and how severe they should be. For many, cutting government spending and raising taxes whilst the economy is still in recession is asking for trouble. For others, it’s the right thing to do and everyone should play a part in helping to return government finances to a semblance of balance. The Labour government has traditionally supported trade unions, but even their leadership backed the government’s plan for pay restraint for public sector workers. This, together with the continuing debates over public sector pensions has clearly angered many public sector workers, thus creating this ‘inevitable’ industrial action over the coming year.

Unison and GMB have said that they will be working together in order to try to better pay and conditions for its members, by co-ordinating public-sector strikes around Spring next year. Co-ordinated strikes across a variety of sectors could create havoc for the economy. Not just disruption for the everyday person, but losses for businesses and the economy. A general strike has not taken place since 1926, but it is thought that TUC delegates will be voting on whether or not one should be planned. So, when faced with these inevitable strikes, should the government back down and cut back on austerity or stand up to them and suffer the disruption of a strike, whilst continuing on with bringing its budget back on track? The following articles look at the TUC Congress and the proposed strike action.

Public sector unions plan Spring strikes Guardian, Dan Milmo (9/9/12)
Trade union warns of further strikes Financial Times, Brian Groom (7/9/12)
Trade union officials gather for TUC Congress in Brighton BBC News, John Moylan (9/9/12)
Unite union leader warns of wave of public sector strikes Guardian, Dan Milmo (7/9/12)
Unison and GMB unions planning co-ordinated strikes over pay BBC News, Justin Parkinson (9/9/12)
TUC Conference 2012: a mixture of new and old Channel 4 News (9/9/12)
Government must stand up to these TUC bully tactics Express, Leo McKinstry (9/9/12)

Questions

  1. What is the purpose of a trade union?
  2. What is the difference between individual and collective bargaining? Why is collective bargaining likely to be more successful in achieving certain aims?
  3. If there is co-ordinated strike action, what are the likely costs for (a) the workers on strike (b) the non-striking workers (c) businesses and (d) the economy?
  4. What are the main issues being debated between unions and the government?
  5. Explain the economic reasoning behind Dave Prentis’ statement that people are being moved into poverty.
  6. Do you agree with strike action? Do you think it has any effect?
  7. When do you think is the right time to implement austerity measures? Has the government got it right? As always, make sure you explain your answer!!
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