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Posts Tagged ‘OECD’

Falling UK real wages – comparison with other OECD countries

In the last blog post, As UK inflation rises, so real wages begin to fall, we showed how the rise in inflation following the Brexit vote is causing real wages in the UK to fall once more, after a few months of modest rises, which were largely due to very low price inflation. But how does this compare with other OECD countries?

In an article by Rui Costa and Stephen Machin from the LSE, the authors show how, from the start of the financial crisis in 2007 to 2015 (the latest year for which figures are available), real hourly wages fell further in the UK than in all the other 27 OECD countries, except Greece (see the chart below, which is Figure 5 from their article). Indeed, only in Greece, the UK and Portugal were real wages lower in 2015 than in 2007.

The authors examine a number of aspects of real wages in the UK, including the rise in self employment, differences by age and sex, and for different percentiles in the income distribution. They also look at how family incomes have suffered less than real wages, thanks to the tax and benefit system.

The authors also look at what the different political parties have been saying about the issues during their election campaigns and what they plan to do to address the problem of falling, or only slowly rising, real wages.

Articles
Real Wages and Living Standards in the UK LSE – Centre for Economic Performance, Rui Costa and Stephen Machin (May 2017)
The Return of Falling Real Wages LSE – Centre for Economic Performance, David Blanchflower, Rui Costa and Stephen Machin (May 2017)
The chart that shows UK workers have had the worst wage performance in the OECD except Greece Independent, Ben Chu (5/6/17)

Data
Earnings and working hours ONS
OECD.Stat OECD
International comparisons of productivity ONS

Questions

  1. Why have real wages fallen more in the UK than in all OECD countries except Greece?
  2. Which groups have seen the biggest fall in real wages? Explain why.
  3. What policies are proposed by the different parties for raising real wages (a) generally; (b) for the poorest workers?
  4. How has UK productivity growth compared with that in other developed countries? What explanations can you offer?
  5. What is the relationship between productivity growth and the growth in real wages?
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OECD goes public

In an attempt to prevent recession following the financial crisis of 2007–8, many countries adopted both expansionary monetary policy and expansionary fiscal policy – and with some success. It is likely that the recession would have been much deeper without such policies

But with growing public-sector deficits caused by the higher government expenditure and sluggish growth in tax receipts, many governments soon abandoned expansionary fiscal policy and relied on a mix of loose monetary policy (with ultra low interest rates and quantitative easing) but tight fiscal policy in an attempt to claw down the deficits.

But such ‘austerity’ policies made it much harder for loose monetary policy to boost aggregate demand. The problem was made worse by the attempt of both banks and individuals to ‘repair’ their balance sheets. In other words banks became more cautious about lending, seeking to build up reserves; and many individuals sought to reduce their debts by cutting down on spending. Both consumer spending and investment were slow to grow.

And yet government and central banks, despite the arguments of Keynesians, were reluctant to abandon their reliance solely on monetary policy as a means of boosting aggregate demand. But gradually, influential international institutions, such as the IMF (see also) and World Bank, have been arguing for an easing of austerity fiscal policies.

The latest international institution to take a distinctly more Keynesian stance has been the Organisation for Economic Co-operation and Development (OECD). In its November 2015 Economic Outlook it had advocated some use of public-sector investment (see What to do about slowing global growth?. But in its Interim Economic Outlook of February 2016, it goes much further. It argues that urgent action is needed to boost economic growth and that this should include co-ordinated fiscal policy. In introducing the report, Catherine L Mann, the OECD’s Chief Economist stated that:

“Across the board there are lower interest rates, except for the United States. It allows the authorities to undertake a fiscal action at very very low cost. So we did an exercise of what this fiscal action might look like and how it can contribute to global growth, but also maintain fiscal sustainability, because this is an essential ingredient in the longer term as well.

So we did an experiment of a two-year increase in public investment of half a percentage point of GDP per annum undertaken by all OECD countries. This is an important feature: it’s everybody doing it together – it’s a collective action, because it’s global growth that is at risk here – our downgrades [in growth forecasts] were across the board – they were not just centred on a couple of countries.

So what is the effect on GDP of a collective fiscal action of a half a percentage point of GDP [increase] in public investment in [high] quality projects. In the United States, the euro area, Canada and the UK, who are all contributors to this exercise, the increase in GDP is greater than the half percentage point [increase] in public expenditure that was undertaken. Even if other countries don’t undertake any fiscal expansion, they still get substantial increases in their growth rates…

Debt to GDP in fact falls. This is because the GDP effect of quality fiscal stimulus is significant enough to raise GDP (the denominator in the debt to GDP ratio), so that the overall fiscal sustainability [debt to GDP] improves.”

What is being argued is that co-ordinated fiscal policy targeted on high quality infrastructure spending will have a multiplier effect on GDP. What is more, the faster growth in GDP should outstrip the growth in government expenditure, thereby allowing debt/GDP ratios to fall, not rise.

This is a traditional Keynesian approach to tackling sluggish growth, but accompanied by a call for structural reforms to reduce inefficiency and waste and improve the supply-side of the economy.

Articles
Osborne urged to spend more on infrastructure by OECD Independent, Ben Chu (18/2/16)
OECD blasts reform fatigue, downgrades growth and calls for more rate cuts Financial Review (Australia), Jacob Greber (18/2/16)
OECD calls for less austerity and more public investment The Guardian, Larry Elliott (18/2/15)
What’s holding back the world economy? The Guardian, Joseph Stiglitz and Hamid Rashid (8/2/16)
OECD calls for urgent action to combat flagging growth Financial Times, Emily Cadman (18/2/16)
Central bankers on the defensive as weird policy becomes even weirder The Guardian, Larry Elliott (21/2/16)
Keynes helped us through the crisis – but he’s still out of favour The Guardian, Larry Elliott (7/2/16)
G20 communique says monetary policy alone cannot bring balanced growth
Reuters (27/2/15)

OECD publications
Global Economic Outlook and Interim Economic Outlook OECD, Catherine L Mann (18/2/16)
Interim Economic Outlook OECD (18/2/16)

Questions

  1. Draw an AD/AS diagram to illustrate the effect of a successful programme of public-sector infrastructure projects on GDP and prices.
  2. Draw a Keynesian 45° line diagram to illustrate the effect of a successful programme of public-sector infrastructure projects on actual and potential GDP.
  3. Why might an individual country benefit more from a co-ordinated expansionary fiscal policy of all OECD countries rather than being the only country to pursue such a policy?
  4. What determines the size of the multiplier effect of such policies?
  5. How might a new classical/neoliberal economist respond to the OECD’s recommendation?
  6. Why may monetary policy have ‘run out of steam’? Are there further monetary policy measures that could be adopted?
  7. Compare the relative effectiveness of increased government investment in infrastructure and tax cuts as alterative forms of expansionary fiscal policy.
  8. Should quantitative easing be directed at financing public-sector infrastructure projects? What are the benefits and problems of such a policy? (See the blog post People’s quantitative easing.)
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Taxing times for Google

Some of the largest companies around the world operate in multiple locations. This allows them to take advantage of wider markets, cheaper transport and of course, lower taxes. In many cases, we see companies selling in one country, but locating their Headquarters in another, where tax rates are cheaper and hence their tax bills are lower. Much criticism has been levelled at such companies, who are accused of not paying their fair share in tax. There has been a crackdown on these companies and the UK is playing a leading role in this tightening of tax laws. Google is the latest company to face a large payment in backdated taxes.

This is a company with a complex structure, which has involved Bermuda as a key location, with its zero rate of corporation tax and a Irish European base. Though locating its business in different countries is legal, it has now agreed to pay HMRC £130 million in back taxes from 2005, following a 6 year investigation. Google will also change its accounting system such that it pays more tax in Britain for sales in this country.

Google may be the first in a line of companies making such changes to its accounting practices following a global drive to tackle the low levels of taxes paid by these large companies. This change in tax rules may bring welcome relief to government coffers, though criticisms remain about the ‘real’ figure that Google owes. As an example of this: in 2013, Google’s UK revenues were $5.6bn. Yet it only paid £20.5m in tax on its UK profits. The Head of Google Europe, Matt Brittin said:

“The rules are changing internationally and the UK government is taking the lead in applying those rules so we’ll be changing what we are doing here. We want to ensure that we pay the right amount of tax.”

Mr Brittin was clear in saying that these back dated taxes are not evidence that they had been paying too little tax in previous years. He confirmed that they were abiding by tax laws at the time and that tax laws are now changing and hence so will the amount of tax they pay. He continued:

“I think there was concern that international companies were paying only in respect of profits that they make and those were the rules and the pressure was to see us pay in respect of the sales we make to UK customers – and the same for other companies…So, we are making a change because we want to continue to comply with the rules and the rules are changing.”

As the push to tighten tax laws changes, with firms paying more tax on sales as well as profits, we may observe more companies changing their accounting structures. The OECD has taken a big step in simplifying international tax laws and the coming years will tell us just how big an impact this will have and whether companies such as Google will face tax bills in other European countries as well. The following articles consider this taxing matter.

Google agrees £130m UK tax deal with HMRC BBC News, Kamal Ahmed (23/01/16)
Google strikes £130m back tax deal Financial Times, John Gapper (22/01/16)
Google strikes deal with UK tax authority Wall Street Journal, Sam Schechner and Stephen Fidler (23/01/16)
Google agrees to pay HMRC £130m in back taxes The Guardian, Kevin Rawlinson (23/01/16)
Google tax labelled ‘derisory’ by Labour’s John McDonnell BBC News (23/01/16)
Google to pay £130 million UK back taxes, critics want more Reuters, Tom Bergin (23/01/16)
Google to pay UK £130m in back taxes The Telegraph (22/01/16)
Google says it will pay £130m in back taxes Independent, Adam Barnett (23/01/16)
Google ‘agrees’ to pay £130m in extra UK tax after outrage when it coughed up just £20m on UK sales of nearly £4bn Mail Online, Imogen Calderwood (22/01/16)
Google agrees to pay $185 million in UK tax settlement Bloomberg, Brian Womack (23/01/16)

Questions

  1. What is the difference between a tax on sales and a tax on profits?
  2. How can companies legally avoid tax? Do you think they have a moral duty to pay tax?
  3. If firms face higher rates of taxation, how will this affect their costs and profits?
  4. Why are the larger multinationals, such as Google more able to engage in tax avoidance schemes?
  5. Do you think the problem of tax avoidance is one of the negative consequences of globalisation?
  6. Is the criticism about the ‘low’ amount of taxes paid to HMRC justified?
  7. The OECD has taken a leading role in tightening international tax policy. Do you think this will negatively impact the competitiveness of the global market place?
  8. What are the costs and benefits to a country of having a low rate of corporation tax?
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What to do about slowing global growth?

First the IMF in its World Economic Outlook, then the European Commission in its Economic Forecasts (see also) and now the OECD in its Economic Outlook (see also) – all three organisations in the latest issues of their 6-monthly publications are predicting slower global economic growth than they did 6 months previously. This applies both to the current year and to 2016. The OECD’s forecast for global growth this year is now 2.9%, down from the 3.7% it was forecasting a year ago. Its latest growth forecast for 2016 is 3.3%, down from the 3.9% it was forecasting a year ago.

Various reasons are given for the gloomier outlook. These include: a dramatic slowdown in global trade growth; slowing economic growth in China and fears over structural weaknesses in China; falling commodity prices (linked to slowing demand but also as a result of increased supply); austerity policies as governments attempt to deal with the hangover of debt from the financial crisis of 2007/8; low investment leading to low rates of productivity growth despite technological progress; and general fears about low growth leading to low spending as people become more cautious about their future incomes.

The slowdown in trade growth (forecast to be just 2% in 2015) is perhaps the most worrying for future global growth. As Angel Gurría, OECD Secretary-General, states in his remarks at the launch of the latest OECD Economic Outlook:

‘Global trade, which was already growing slowly over the past few years, appears to have stagnated and even declined since late 2014, with the weakness centering increasingly on emerging markets, particularly China. This is deeply concerning as robust trade and global growth go hand in hand. In 2015 global trade is expected to grow by a disappointing 2%. Over the past five decades there have been only five other years in which trade growth has been 2% or less, all of which coincided with a marked downturn of global growth.’

So what policies should governments pursue to stimulate economic growth? According to Angel Gurría:

‘Short-term demand needs to be supported and structural reforms to be pursued with greater ambition than is currently the case. Three specific actions are key:

•  First, we need to resist and turn back rising protectionism. Trade strengthens competition and investment and revs up the “diffusion machine” – the spread of new technologies throughout the economy – which will ultimately lift productivity.
•  Second, we need to step up structural reform efforts, which have weakened in recent years. And here, I mean the whole range of structural reforms – education, innovation, competition, labour and product market regulation, R&D, taxes, etc.
•  Third, there is scope to adjust public spending towards investment. If done collectively by all countries, if the sector and projects chosen have high multipliers, and if combined with serious structural reforms, stronger public investment can give a boost to growth and employment and not increase the relative debt burden.’

On this third point, the OECD Economic Outlook argues that ‘the rationale for such investments is that they could help to push economies onto a higher growth path than might otherwise be the case, at a time when private investment growth remains modest.’

Collective action to increase public investment can be expected to boost the initial domestic multiplier effects from the stimulus, since private investment and exports in each economy will benefit from stronger demand in other economies. …the multiplier effects from an investment-led stimulus are likely to be a little larger than from other forms of fiscal stimulus, since the former also has small, but positive, supply-side effects.

In other words, the OECD is calling for a relaxation of austerity policies, with public investment being used to provide a stimulus to growth. The higher growth will then lead to increased potential output, as well as actual output, and an increase in tax revenues.

These policy recommendations are very much in line with those of the IMF.

Videos and Webcasts
OECD warns of global trade slowdown, trims growth outlook again Reuters (9/11/15)
OECD returns to revisionism with growth downgrade Euronews, Robert Hackwill (9/11/15)
OECD: Weak China Import Growth Leads Trade Slowdown Bloomberg, Catherine L Mann, OECD Chief Economist (9/11/15)
OECD Economic Outlook: Moving forward in difficult times OECD PowerPoint presentation, Catherine L Mann, OECD Chief Economist (9/11/15)
Press Conference OECD, Angel Gurría and Álvaro Pereira (9/11/15)

Articles
OECD cuts world growth forecast Financial Times, Ferdinando Giugliano (9/11/15)
OECD rings alarm bell over threat of global growth recession thanks to China slowdown Independent, Ben Chu (10/11/15)
OECD cuts global growth forecasts amid ‘deep concern’ over slowdown BBC News (9/11/15)
OECD fears slowdown in global trade amid China woes The Guardian, Katie Allen (9/11/15)
The global economy is slowing down. But is it recession – or protectionism? The Observer, Heather Stewart and Fergus Ryan (14/11/15)
Global growth is struggling, but it is not all bad news The Telegraph, Andrew Sentance (13/11/15)

OECD Publications
Economic Outlook Annex Tables OCED (9/11/15)
Press Release: Emerging market slowdown and drop in trade clouding global outlook OCED (9/11/15)
Data handout for press OECD (9/11/15)
OECD Economic Outlook, Chapter 3: Lifting Investment for Higher Sustainable Growth OCED (9/11/15)
OECD Economic Outlook: Full Report OECD (9/11/15)

Questions

  1. Is a slowdown in international trade a cause of slower economic growth or simply an indicator of slower economic growth? Examine the causal connections between trade and growth.
  2. How worried should we be about disappointing growth in the global economy?
  3. What determines the size of the multiplier effects of an increase in public investment?
  4. Why are the multiplier effects of an increase in public-sector investment likely to be larger in the USA and Japan than in the UK, the eurozone and Canada?
  5. How can monetary policy be supportive of fiscal policy to stimulate economic growth?
  6. Under what circumstances would public-sector investment (a) stimulate and (b) crowd out private-sector investment?
  7. How would a Keynesian economist respond to the recommendations of the OECD?
  8. How would a neoclassical/neoliberal economist respond to the recommendations?
  9. Are the OECD’s recommendations in line with the Japanese government’s ‘three arrows‘?
  10. What structural reforms are recommended by the OECD? Are these ‘market orientated’ or ‘interventionist’ reforms, or both? Explain.
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UK productivity: a constraint on long-term growth

‘Employment has been strong, but productivity and real wages have been flat.’ This is one of the key observations in a new OECD report on the state of the UK economy. If real incomes for the majority of people are to be raised, then labour productivity must rise.

For many years, the UK has had a lower productivity (in terms of output per hour worked) than most other developed countries, with the exception of Japan. But from 1980 to the mid 2000s, the gap was gradually narrowing. Since then, however, the gap has been widening again. This is illustrated in Chart 1, which shows countries’ productivity relative to the UK’s (with the UK set at 100). (Click here for a PowerPoint.)

Compared with the UK, GDP per hour worked in 2013 (the latest data available) was 28% higher in France, 29% higher in Germany and 30% higher in the USA. What is more, GDP per hour worked and GDP per capita in the UK fell by 3.8% and 6.1% respectively after the financial crisis of 2007/8 (see the green and grey lines in Chart 2). And while both indicators began rising after 2009, they were still both below their 2007 levels in 2013. Average real wages also fell after 2007 but, unlike the other two indicators, kept on falling and by 2013 were 4% below their 2007 levels, as the red line in Chart 2 shows. (Click here for a PowerPoint.)

Although productivity and even real wages are rising again, the rate of increase is slow. If productivity is to rise, there must be investment. This could be in physical capital, human capital or, preferably, both. But for many years the UK has had a lower rate of investment than other countries, as Chart 3 shows. (Click here for a PowerPoint.) This chart measures investment in fixed capital as a percentage of GDP.

So how can investment be encouraged? Faster growth will encourage greater investment through the accelerator effect, but such an effect could well be short-lived as firms seek to re-equip but may be cautious about committing to increasing capacity. What is crucial here is maintaining high degrees of business confidence over an extended period of time.

More fundamentally, there are structural problems that need tackling. One is the poor state of infrastructure. This is a problem not just in the UK, but in many developed countries, which cut back on public and private investment in transport, communications and energy infrastructure in an attempt to reduce government deficits after the financial crisis. Another is the low level of skills of many workers. Greater investment in training and apprenticeships would help here.

Then there is the question of access to finance. Although interest rates are very low, banks are cautious about granting long-term loans to business. Since the financial crisis banks have become much more risk averse and long-term loans, by their nature, are relatively risky. Government initiatives to provide finance to private companies may help here. For example the government has just announced a Help to Grow scheme which will provide support for 500 small firms each year through the new British Business Bank, which will provide investment loans and also grants on a match funding basis for new investment.

Articles
OECD: UK must fix productivity Economia, Oliver Griffin (25/2/15)
The UK’s productivity puzzle BBC News, Lina Yueh (24/2/15)
OECD warns UK must fix productivity problem to raise living standards The Guardian, Katie Allen (24/2/15)
Britain must boost productivity to complete post-crisis recovery, says OECD International Business Times, Ian Silvera (24/2/15)
OECD urges UK to loosen immigration controls on skilled workers Financial Times, Emily Cadman and Helen Warrell (24/2/15)

Report
OECD Economic Surveys, United Kingdom: Overview OECD (February 2015)
OECD Economic Surveys, United Kingdom: Full report OECD (February 2015)

Questions

  1. In what ways can productivity be measured? What are the relative merits of using the different measures?
  2. Why has the UK’s productivity lagged behind other industrialised countries?
  3. What is the relationship between income inequality and labour productivity?
  4. Why has UK investment been lower than in other industrialised countries?
  5. What are zombie firms? How does the problem of zombie firms in the UK compare with that in other countries? Explain the differences.
  6. What policies can be pursued to increased labour productivity?
  7. What difficulties are there in introducing effective policies to tackle low productivity?
  8. Should immigration controls be lifted to tackle the problem of a shortage of skilled workers?
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How much does aid aid development?

Many rich countries have made repeated commitments to the United Nations to give at least 0.7% of their gross national income (GNY) as international aid – or ‘official development assistance (ODA)’ as it is known. The first such commitments were made in 1970. Despite this, many of these countries’ aid to developing countries falls well short of the target.

In fact the average amount given in aid in 2011 by the 23 donor countries which are members of the OECD’s Development Assistance Committee (DAC) was a mere 0.31% of GNY, with the USA, the biggest donor in absolute terms, giving only 0.2% of GNY. (Click here for a PowerPoint of the chart.) Since 2003, the DAC average has been 0.29% as compared with 0.30% between 1970 and 2002.

In 2005, at the Gleneagles G8 summit, the 15 members of the EU which are Development Assistance Committee members committed themselves to reaching an ODA target of 0.51% of GNY in 2010 and to reach the 0.7% target by 2015. In 2011, the UK’s ODA/GNY ratio stood at 0.56% and so was above the EU target.

Section 18 of the Coalition agreement pledges that the UK government will meet the 0.7% target by 2013 – a pledge initially made by the Labour government. So far, the government has stuck to this pledge and the aid budget has escaped cuts.

But with other parts of government expenditure facing cuts, pressure is mounting on the government to reduce the aid budget. There are two main parts to the argument. The first is that aid should face its ‘fair share’ of the cuts. The second is that aid is often an inefficient way of tackling poverty in developing countries and, when discussing aid, the focus should be on getting value for money rather than on the simple total amount of aid.

The following articles look at arguments for and against meeting aid targets and examine ways of making aid ‘smarter’.

Articles
Money may be tight, but ‘smart aid’ to developing countries can really work The Guardian, Larry Elliott (13/1/13)
International aid, but not as we know it The Guardian, Andy Sumner and Richard Mallett (31/12/12)
One in four support Britain’s foreign aid policies The Telegraph, Ben Leach (29/12/12)
Why is so much UK aid money still going to companies based in Britain? The Guardian, Claire Provost and Nicola Hughes (21/9/12)
Is the 0.7% aid target still relevant? The Guardian, Niels Keijzer (2/8/12)
What’s wrong with foreign aid? The Spectator (3/1/13)
Five reasons to deliver and legislate on international aid bond, UKAN (6/12)
The Political Economy of Bilateral Foreign Aid Working Knowledge, Harvard Business School, Eric D. Werker (4/1/13)
Misconceptions about aid Dawn (Pakistan), Niaz Murtaza (8/1/13)
Why political short-sightedness and randomised control trials can be a deadly mix for aid effectiveness Vox EU, Anders Olofsgård (13/10/12)
Aid in troubled times DfID, Paul Collier (2/7/12)

Data and information
Aid Effectiveness data World Bank
Aid statistics OECD
Aid effectiveness OECD
Aid Wikipedia

Questions

  1. What was agreed at the Gleneagles G8 summit?
  2. Examine the argument that aid crowds out private investment.
  3. Compare the relative benefits of tied and untied aid.
  4. Give some examples of ‘smart aid’.
  5. How would you establish whether or not it is ‘fair’ to cut the aid budget?
  6. Give three arguments for maintaining the aid budget and three arguments for cutting it. On which side do you come down and why?
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Swiss banking

If you are lucky enough to have piles of money earning interest in a bank account, one thing you don’t want to be doing is facing the dreaded tax bill on the interest earned. It is for this reason that many wealthy people put their savings into bank accounts in Switzerland and other countries with strict secrecy laws. Countries, such as Liechtenstein, Switzerland, Andorra, Liberia and the Principality of Monaco have previously had laws in place to prevent the effective exchange of information. This had meant that you could keep your money in an account there and the UK authorities would be unable to obtain any information for their tax records.

However, as part of an ongoing OECD initiative against harmful tax practices, more and more countries have been opening up to the exchange of information. In recent developments, Switzerland and the UK have signed an agreement, which will see them begin to negotiate on improving information exchange. In particular, the UK will be looking at the possibility of the Swiss authorities imposing a tax on any interest earned in their accounts by UK residents. This tax would be on behalf of HM Revenue and Customs. One concern, however, with this attempted crack down on tax evasion is that ‘innocent’ taxpayers could be the ones to suffer.

The following articles consider this recent development. It is also a good idea to look at the following link, which takes you to the OECD to view some recent agreements between the UK and other countries with regard to tax policy and the exchange of information. (The OECD)

Articles
UK in talks over taxing Britons’ Swiss bank accounts BBC News (26/10/10)
Doubts on plans to tackle tax evasion Telegraph, Myra Butterworth (21/10/10)
HMRC letters target taxpayers with Swiss bank accounts BBC News (25/10/10)
Spending Review: Can the taxman fix the system? BBC News, Kevin Peachey (22/10/10)
Britain, Switzerland agree to begin tax talks AFP (26/10/10)
Treasury to get £1 billion windfall in Swiss deal over secret bank accounts Guardian, Phillip Inman (26/10/10)
Swiss to help UK tax secret accounts Reuters (25/10/10)

Reports
The OECD’s Project on Hamful Tax Practices, 2006 Update on Progress in Member Countries The OECD, Centre for Tax Policy and Administration 2006
A Progress Report on the Jurisdictions surveyed by the OECD global forum in implementing the internationally agreed tax standard The OECD, Centre for Tax Policy and Administration (19/10/10)

Questions

  1. Is there a difference between tax avoidance and tax evasion?
  2. If there is crack down on tax evasion, what might be the impact on higher earners? How could this potential policy change adversely affect the performance of the UK economy?
  3. If tax evasion is reduced, what are the likely positive effects on everyday households?
  4. Is clamping down on tax evasion cost effective?
  5. What might be the impact on people’s willingness to work, especially of those on higher wages, if there is no longer a ‘haven’ where they can save their money?
  6. How could tax reform help the UK reduce its budget deficit?
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Inflationary credibility

In the UK, we have an inflation target of 2% and it’s the Bank of England’s job to use monetary policy, in particular interest rates, to keep inflation within 1 percentage point of its target. However, with rising commodity prices and the onset of recession back in 2008, interest rates had another objective: to prevent or at least lessen the recession. Bank Rate fell to 0.5% and there it has remained in a bid to encourage investment, discourage saving and increase consumption, as a means of stimulating the economy.

However, at such a low rate, interest rates are not acting as a brake on inflation, which is now well above target. This rise in inflation, has been largely brought about by cost-push factors, such as the restoration of the 17.5% VAT (up from the temporary 15%), higher oil and commodity prices, and a fall in the exchange rate. But part of the reason might be found in the increase in money supply that resulted from quantitative easing.

There are concerns that the UK may lose its credibility on inflation if action isn’t taken. The OECD has advised the Bank of England to raise Bank Rate to 3.5% by the end of 2011. The following articles consider this issue.

Articles
Time to worry about inflation? BBC News blogs, Stephanomics, Stephanie Flanders (28/5/10)
UK must not fall for the false promise of higher inflation Telegraph, Charles Bean, Deputy Governor of the Bank of England (4/6/10)

Reports and documents
General Assessment of the Macroeconomic Situation OECD Economic Outlook, No. 87 Chapter 1 (see especially pages 53–4) (May 2010)
United Kingdom – Country Summary OECD Economic Outlook, No. 87 (May 2010)
Statistical Annex OECD Economic Outlook, No. 87 (available 10/6/10)
Inflation Report portal Bank of England (see May 2010)

Questions

  1. Explain the relationship between interest rates and inflation. Why have such low interest rates caused inflation to increase?
  2. In 2008, the UK moved into recession, but was also suffering from inflation. This was unusual, as AD/AS analysis suggests that when aggregate demand falls, growth will fall, but so will prices. What can explain the low growth and inflation we saw in 2008?
  3. What is the difference between real and nominal GDP?
  4. What are the causes of the current high inflation and what solutions are available and viable?
  5. Why are expectations of inflation so important and how might they influence the Bank of England’s plans for interest rates?
  6. Do you think the OECD should have advised the Bank of England? Will there be any adverse effects internationally if the UK doesn’t heed the OECD’s advice?
  7. Is the OECD’s assessment of the UK in the above Country Summary consistent with its view on UK interest rates contained in pages 53 and 54 in the first OECD link?
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Bouncing back?

The OECD published its latest interim assessment of the world economy on April 7. This showed a world gradually bouncing back from recession, with growing GDP (albeit at variable speeds in different countries), rising industrial production, increasing business confidence, a stabilising of financial markets, an easing of credit conditions and yet continuing low inflation.

The UK is forecast to have an annualised rate of growth of GDP in quarter 2 of 3.1%. This is the second highest of the G7 countries, behind only Canada. This would seem like good news – an economic spring for the UK.

Despite continuing growth in the OECD countries, in most of them recovery is fragile. The OECD thus recommends caution in removing the stimulus measures adopted in most countries and hence caution in embarking on measures to cut public-sector deficits. As the report states:

Despite some encouraging signs on activity, the fragility of the recovery, a frail labour market and possible headwinds coming from financial markets underscore the need for caution in the removal of policy support. Central banks have already begun to rein in the exceptional liquidity stimulus injected during the recession. Further action in this area will need to be guided by financial conditions. The normalisation of policy interest rates should be carried out at a pace that will be contingent on the strength of the recovery in individual countries and the outlook for inflation beyond the near-term projection horizon. As for fiscal policy, the sharp increase in government indebtedness in the OECD area during the downturn calls for ambitious, clearly communicated medium-term consolidation programmes in many countries. Consolidation should start in 2011, or earlier where needed, and progress gradually so as not to undermine the incipient recovery.

The following webcast from the OECD presents the report.

Webcast
Interim Assessment OECD, Pier Carlo Padoan, OECD Chief Economist (7/4/10)

Report
Portal to report and webcast OECD
What is the economic outlook for OECD countries? An interim assessment OECD, Pier Carlo Padoan (7/4/10)

Articles
Economy set to speed up and beat UK’s rivals, says OECD Independent, Sean O’Grady (8/4/10)
Economy poised for rapid expansion Financial Times, Norma Cohen and Daniel Pimlot (8/4/10)
OECD sees slower growth in US, Europe, Japan Sydney Morning Herald (8/4/10)
UK business confidence ‘hits four-year high’ BBC News (12/4/10)
British companies confident of recovery but need investment, BDO warns Telegraph, Angela Monaghan (12/4/10)

Questions

  1. What are the main findings in the report?
  2. What are the policy implications of the findings?
  3. What are the implications of developments in financial markets? What are the possible ‘headwinds’?
  4. What factors could threaten the recovery of the UK economy?
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Don’t break open the champagne quite just yet (updated)

On the eve of the September 5/6 G20 meeting of Finance Ministers in London, the OECD published an interim forecast of the macroeconomic and financial performance of the G7 economies. According to the OECD, “Recovery from the global recession is likely to arrive earlier than had been expected a few months ago but the pace of activity will remain weak well into next year.” So is it time to start reversing the various fiscal and monetary stimuli adopted around the world? Or should governments and central banks continue to stimulate aggregate demand in order to maintain the fragile recovery? The following news releases, speeches and articles look at answers given to these questions by various countries and international institutions.

Recovery arriving quicker than expected but activity will remain weak, says OECD OECD News release (3/9/09)
What is the economic outlook for OECD countries? An interim assessment OECD Economic Outlook, Interim Assessment (3/9/09)
IMF Managing Director Dominique Strauss-Kahn sees Renewed Stability but remains cautious about Global Economic Recovery, notes need for Continued Policy Actions IMF press release (4/9/09)
Beyond the Crisis: Sustainable Growth and a Stable International Monetary System Speech by Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (4/9/09)
Brown urges further G20 spending (video) Gordon Brown on BBC News (5/9/09)
America’s Timothy Geithner says it’s ‘too early’ to withdraw economic stimulus Telegraph (3/9/09)
Finance chiefs warn against early end to state support for eurozone economies Guardian (3/9/09)
Keep spending – Darling warns G20 against complacency Independent (3/9/09)
Brown’s agenda deserves a hearing Financial Times (1/9/09)
Tories join Germany and France in call for exit strategy from G20 bailout Times Online (3/9/09)
UK recession: Why are we lagging our neighbours? Telegraph (3/9/09)

Reflections after the conference:
After the shock, challenges remain BBC News (7/9/09)
The G20 has saved us, but it’s failing to rein in those who caused the crisis Observer (6/9/09)
The world is as one on not endangering recovery Times Online (t/9/09)

Questions

  1. Why is the pace of recovery in the G7 countries likely to be modest for some time?
  2. Why have unemployment rates risen much more rapidly in some countries than in others (see page 19 of the OECD report)?
  3. Referring to the OECD report, how would you summarise changes in the global financial situation over the past few months?
  4. Assess the arguments put forward by France and Germany for reining in their expansionary fiscal and monetary policies.
  5. Why is the UK economy, according to the OECD, likely to be the last of the G7 countries to pull out of recession?
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