In a previous blog, Anyone got a crystal ball?, we reported on the Bank of England’s and other agencies’ difficulty in making forecasts. As the Governor, Mervyn King, said, “There is just enormous uncertainty out there.”
The Bank of England has just published its November Inflation Report. This quarterly publication gives forecasts of inflation, GDP and other indicators. It is clear that forecasting hasn’t become any easier. In his opening remarks, Dr. King says:
Continuing the recent zig-zag pattern, output growth is likely to fall back sharply in Q4 as the boost from the Olympics in the summer is reversed – indeed output may shrink a little this quarter. It is difficult to discern the underlying picture. It is probably neither as good as the zigs suggest nor as bad as the zags imply.
The Inflation Report looks at the various factors affecting aggregate demand, inflation, unemployment and aggregate supply. It is quite clear on reading the report why there is so much uncertainty.
A salutary lesson is to look back at previous forecasts and see just how wrong they have been. The chart above shows the forecasts for GDP made in the Inflation Reports of Nov 2012 and Aug 2011. You can see that they are significantly different and yet just 15 months apart. You might also like to compare the forecasts made a year ago (or even two!) about 2012 with the actual situation today. A good source for this is the Treasury’s Forecasts for the UK economy. This collates the forecasts from a range of independent forecasters.
The inaccuracy of forecasting is an inevitable consequence of a highly interdependent world economy that is subject to a range of economic shocks and where confidence (or lack of it) is a major determinant of aggregate demand. But when firms, governments, individuals and central banks have to make plans, it is still necessary to project into the future and try to forecast as accurately as possible – even though it might mean keeping your fingers firmly crossed.
Articles
Bank of England downgrades growth forecast for 2013 Daily Record (14/11/12)
A gloomy picture from the Old Lady Financial Times (14/11/12)
Will Britain’s post-recession economy be resurgent, stagnant or greener? The Guardian, Larry Elliott (11/11/12)
Economics must heed political risk Financial Times, Sebastian Mallaby (6/11/12)
European Commission autumn forecast: overoptimistic and in denial Social Europe Journal, Andrew Watt (7/11/12)
Bank of England gets long to-do list for overhaul Reuters, Sven Egenter (2/11/12)
Data
Inflation Report, November 2012 Bank of England
Index of economic forecasts European Commission DGECFIN
Economic Outlook Annex Tables OECD
World Economic Outlook Reports IMF
Forecasts for the UK economy HM Treasury
Questions
- What was being forecast for economic growth and inflation for 2012 (a) one year ago; (b) two years ago?
- What are the main reasons for the inaccuracy of forecasts?
- How might forecasting be made more reliable?
- If sentiment is a key determinant of economic activity, how might politicians increase the confidence of firms and consumers? What are the political constraints on doing this?
- Explain the following statement from the Guardian article: “The problem … is that last decade’s tailwind has become this decade’s headwind.” Why is it difficult to forecast the strength of this ‘headwind’?
- How useful is it to use past trends as a guide to the future course of the economy?
UK Unemployment figures for the July to September period have just been published. Perhaps surprisingly, the rate has fallen to 7.8% from 8.0% in the previous 3-month period. What is more, there have been similar 0.2 percentage-point falls in each of the two 3-month periods prior to that (see chart below).
This would normally suggest that the economy has been growing strongly and faster than the growth in potential output. But, despite positive economic growth in quarter 3 (see A positive turn of events?), the economy has been experiencing a prolonged period of low or negative growth.
So what is the explanation for the fall in unemployment? (For a PowerPoint of the chart, click here)
One reason is a greater flexibility in the labour market than in previous recessions. People are more willing to accept below inflation wage increases, or even nominal wage cuts, in return for greater job security. Others are prepared to reduce their hours.
The other reason is a fall in productivity (i.e. output per hour worked). One explanation is that people are not working so hard because, with a lack of demand, there is less pressure on them to be productive; a similar explanation is that firms are ‘hoarding’ labour in the hope that the market will pick up again.
Another explanation is that employment growth has often occurred in the low productivity industries, such as labour-intensive service industries; another is that when people leave their jobs they are replace by less productive workers on lower wages; another is that workers are making do with ageing equipment, whose productivity is falling, because firms cannot afford to invest in new equipment. An range of possible explanations is given on page 33 of the Bank of England’s November 2012 Inflation Report.
But with many predicting that growth will be negative again in 2012 quarter 4, the fall in unemployment may not continue. Britain may join many other countries in Europe and experience rising unemployment as well as falling output.
Articles
Government hails fall in jobless total The Guardian, Hélène Mulholland (14/11/12)
UK unemployment figures: analysis The Guardian, Larry Elliott (14/11/12)
Jobless claims rise as Olympics effect wanes The Telegraph, Rachel Cooper and Louisa Peacock (14/11/12)
UK unemployment falls to 2.51 million, ONS says BBC News (14/11/12)
Unemployment continuing to fall BBC News, Stephanie Flanders (14/11/12)
Britain’s recession: Harsh but fair? BBC News, Stephanie Flanders (17/10/12)
The UK productivity puzzle (cont’d) BBC News, Stephanie Flanders (20/9/12)
UK jobs: The plot thickens BBC News, Stephanie Flanders (15/8/12)
Data
Unemployment: the key UK data and benefit claimants for every constituency Guardian Data Blog
Labour Market Statistics, November 2012 ONS
Video Summary: Latest on the Labour Market, November 2012 ONS
Labour Productivity, Q2 2012 ONS
International Comparisons of Productivity, First estimates for 2011 ONS
Questions
- What possible explanation are there for the latest fall in unemployment?
- What has been happening to employment, both full time and part time?
- What are the different ways of measuring productivity? Why will they be affected differently by a fall in the average number of hours worked?
- Why might it be in firms’ interests to maintain the level of their workforce despite falling sales?
- Assume that there has been a fall in aggregate demand. Compare the resulting effect on consumption of (a) a fall in wages rates; (b) a rise in unemployment. How might the design of the benefit system affect the answer?
More and more food banks are opening every week across the developed world. In the UK alone, there are over 250 food banks. These are run by volunteers and provide food and other basic provisions to those who struggle to feed themselves and their children. The food is donated by people or sometimes supermarkets. Some food banks receive financial help from local authorities.
According to the Trussell Trust, which runs many food banks in the UK, “In 2011-12 food banks fed 128,687 people nationwide, 100% more than the previous year.” But why, in mixed economies, where the State is expected to provide benefits to the poor, do so many people have to resort to food handouts?
Partly the problem is a cut in benefits – a response of many countries to rising public-sector deficits; partly it’s delays in receiving benefits or the complexities in claiming; partly it’s because some people have had their benefits suspended because of a change in their circumstances or changes in the conditions for claiming benefits; partly it’s the inability of people to afford to feed their families properly in times of rising food and energy prices and rising rents, where incomes are not rising in line with the personal rates of inflation that poor households experience; partly it’s the sky-high interest rates that many poor people, often deep in debt, have to pay to continue obtaining credit – often from ‘payday loan companies’ or ‘doorstep lenders’; partly it’s the inability of many poor people to find work which pays enough to feed their families and pay all their other bills.
Food poverty is a real and growing problem. But are food banks the answer? The following videos and articles look at the issues.
Webcasts
UK
Growing demand for food banks in Britain BBC Newsnight, Paul Mason (5/9/12)
Children will go hungry warn Bristol food banks This is Bristol, (2/7/12)
Children going hungry ITV News (16/10/12)
Food bank: We need more food to feed UK’s hungry The Telegraph, Gregg Morgan (27/9/12)
Food banks help struggling London families BBC News (21/6/12)
Europe
EU food aid to dry up by 2014? France 24 (16/10/12)
Spain
Food banks squeezed in Spain Euronews (3/11/12)
USA
As donations dwindle, food banks are feeling the pinch Komo News, Elisa Jaffe (28/9/12)
Articles
UK
Breadline Britain: councils fund food banks to plug holes in welfare state The Guardian, Patrick Butler (21/8/12)
Councils to invest in food banks LocalGov, Dominic Browne (22/8/12)
The growing demand for food banks in breadline Britain BBC News, Paul Mason (4/9/12)
Food banks: ‘I had no-one else to turn to’ BBC News (4/9/12)
Poorest starved of dignity as charity food parcels double in just two years Daily Record (4/9/12)
More and more banking on generosity to others for food South Wales Evening Post (13/11/12)
USA
Northern Illinois Food Bank Kicks Off Hunger Action Month St. Charles Patch, Rick Nagel (1/9/12)
Australia
More families get help as food becomes discretionary spend Sydney Morning Herald (21/8/12)
Information
How a foodbank works The Trussell Trust
Questions
- Why do so many people find themselves trapped in food poverty?
- What factors are likely to lead to an increase in food poverty in the coming months?
- Should the government subsidise food banks?
- Discuss ways of tackling the problem of poor families being trapped in debt and having to pay very high interest rates.
- Is rent control a good means of tackling poverty?
Original post
Starbucks’ UK sales in 2011 were worth £398m. Costa’s UK sales were worth £377m. But while Costa paid £15m in corporation tax in 2011/12, Starbucks paid nothing! In fact since opening its first coffee shop in the UK in 1998 it has paid just £8.6m in taxes on UK sales of £3bn.
How is this possible? Let’s look at Starbuck’s 2011 UK sales. Even though these were worth £398 million, its costs were recorded as £426.2m, giving a loss of £28.2m. Costa, by contrast, reported a taxable profit of £49.7m.
So is Starbucks a commercial failure in the UK, recording year after year of losses? Not at all. Starbucks regards the UK as a highly profitable part of its business. As the Independent article below states:
…in its briefings to stock market investors and analysts during the past 12 years, Seattle-based Starbucks has consistently stated that its UK unit is “profitable” and three years ago even promoted its UK head, Cliff Burrows, to run its vastly larger US operation.
So how can reported UK losses be reconciled with a profitable UK operation? The answer lies in transfer pricing.
Transfer pricing refers to the prices a company charges itself when goods or services are transferred within the company but from one country to another. By varying the transfer prices, a company can choose where to make its profits. Thus if Starbucks’ US operation charges high prices to its UK operation for various services, such as royalties for the use of branding or for management services, or lends money to its UK operation at high interest rates, Starbucks’ profits will rise in the USA and fall in the UK.
Companies employ tax advisers (see for example) and ‘transfer pricing managers’ to help them move their profits from high tax countries to low tax countries. In Starbuck’s case, by charging its UK operation high prices for such things as ‘use of its logo’ it has chosen to move all its profits out of the UK and thus avoid UK corporation tax.
Apart from denying the UK government tax revenues, the practice by Starbucks distorts competition as competing UK companies, such as Costa, AMT, Caffè Ritazza and the many small independents, do not have the same opportunity for transfer pricing and do pay UK corporation tax. As the Guardian article by Richard Murphy below states:
We do have homegrown coffee shops in the UK. A lot of them. And they have to pay their taxes in full here in the UK. They can’t make payments to offshore entities for the use of their logos or advice on how to add hot water to coffee just to avoid tax: they have to pay in full on what they earn in this country. What Starbucks is doing may be legal, but what it also shows is that business does not operate on a level playing field in the UK.
And, as some of the articles below demonstrate, it’s not just Starbucks. Amazon, Facebook and Google have also been accused of avoiding taxes in the UK by engaging in forms of transfer pricing.
Update
On 12 November senior executives from Starbucks, Google and Amazon appeared before the House of Commons Public Accounts Committee to give evidence on their non-payment of corporation tax and their apparent lack of profits in the UK. As you will see from the videos, the MPs were unimpressed by the answers they received.
At the G20 finance ministers meeting in Mexico the previous week, George Osborne, the UK Chancellor, and Wolfgang Schäuble, the German Finance Minister, called for “concerted international co-operation to strengthen international tax standards that at the minute may mean international companies can pay less tax than they would otherwise owe”.
There seems to be mounting international pressure on multinationals to cease using transfer pricing as a means of avoiding paying taxes. Whether it will be successful remains to be seen.
Further Update (June 2013)
In June 2013, After continuing criticism of its tax avoidance policies, Starbucks agreed to pay £10m in corporation tax tin 2013/14 and a further £10m in 2014/15.
Articles for original post
Starbucks UK tax bill comes under scrutiny The Telegraph, Helia Ebrahimi (15/10/12)
Good bean counters? Starbucks has paid no tax in UK since 2009 Independent, Martin Hickman (16/10/12)
Special Report: How Starbucks avoids UK taxes Reuters, Tom Bergin (15/10/12)
Business Starbucks ‘paid no UK income tax’ since 2009 Channel 4 News (16/10/12)
Starbucks ‘paid just £8.6m UK tax in 14 years’ BBC News, Vicki Young (16/10/12)
Starbucks’ tax payment is ‘unfair’ say independent cafes BBC News, Joe Lynam (16/10/12)
Starbucks ‘paid just £8.6m UK tax in 14 years’ BBC News (16/10/12)
What the Starbucks tax expose means for ordinary companies Tax Research UK, Richard Murphy (16/10/12)
Starbucks ‘pays £8.6m tax on £3bn sales’ The Guardian, Simon Neville (15/10/12)
How much tax do Starbucks, Facebook and the biggest US companies pay in the UK The Guardian Datablog (16/10/12)
Amazon: £7bn sales, no UK corporation tax The Guardian, Ian Griffiths (4/4/12)
Facebook criticised for £238,000 UK tax bill last year BBC Radio 1 Newsbeat, Dan Cairns (11/10/12)
U.S. Companies Dodge $60 Billion in Taxes With Global Odyssey Bloomberg, Jesse Drucker (13/5/10)
EBay ‘pays £1.2m in UK tax’ on sales of £800m BBC News (21/10/12)
Articles for update
Starbucks, Google and Amazon grilled over tax avoidance BBC News (12/11/12)
Companies have ‘social responsibility’ to pay tax BBC Today Programme (12/11/12)
MPs slam Starbucks, Amazon and Google on tax Reuters, Tom Bergin (12/11/12)
A highly taxing session for the men from Amazon, Google and Starbucks The Guardian, Simon Hoggart (12/11/12)
Starbucks is leeching tax revenue from UK The Telegraph, Lord Myners (12/11/12)
UK and Germany agree crackdown on tax loopholes for multinationals The Guardian, Patrick Wintour and Dan Milmo (5/11/12)
Britain, Germany target tax from multinationals Deutsche Welle (5/11/12)
HMRC unable to stop multinational tax avoidance accountancylive, Sharon Khin (6/11/12)
Starbucks ‘planning changes to tax policy’ BBC News (3/12/12)
Articles for further update
Starbucks pays UK corporation tax for first time since 2009 BBC News (22/6/13)
Starbucks pays corporation tax, promising the Exchequer £20m over two years IndependentHeather Saul (2/6/13)
Starbucks pays first tax since 2008 The Telegraph, Kamal Ahmed (22/6/13)
Report of Public Accounts Committee
Tax avoidance by multinational companies UK Parliament (3/12/12)
Questions
- Explain how a multinational company can use transfer pricing as a means of reducing its overall tax liability.
- Why may transfer pricing lead to an inefficient allocation of resources?
- What policies can governments adopt to clamp down on the use of transfer pricing to limit their tax liability in their country?
- What insights are shed by game theory in explaining why it may be very difficult to reach international agreement to clamp down on tax avoidance?
- Is it immoral for companies to seek to minimise their tax liability? What are the limits of economics as a discipline in establishing an answer to this question?
The problem of obesity and healthy eating is a growing problem in many countries and governments have long been looking into designing policy to tackle this issue.
Some have gone for healthy eating campaigns and policies to encourage pregnant women to eat better, but one government took it a step further and introduced a Fat Tax. In October 2011, the Danish government introduced a tax on foods that are high in saturated fat in a bid to reduce consumption of these goods. However, this policy is now to be abolished.
The Fat Tax introduced by the government imposed a surcharge on foods that contained more than 2.3% saturated fat. Numerous products were affected, including meats, dairy and as expected – processed foods. The policy was criticised by scientists who said that saturated fat was the wrong target and perhaps they were proved right, but the government’s u-turn, which will now see the tax being abolished. The tax had gradually increased food prices throughout the country and authorities said that it had even put Danish jobs at risk.
With food prices much higher in Denmark with the tax, consumers switched from buying domestically produced goods to crossing the border into Germany and purchasing their cheaper food. This undoubtedly had an adverse effect on the Danish economy, as it represented a cut in consumer expenditure. Perhaps it also helps to explain Germany’s strong economy – it was feeding 2 nations! The Danish tax ministry said:
‘The fat tax and the extension of the chocolate tax — the so-called sugar tax — has been criticised for increasing prices for consumers, increasing companies’ administrative costs and putting Danish jobs at risk … At the same time it is believed that the fat tax has, to a lesser extent, contributed to Danes travelling across the border to make purchases … Against this background, the government and the (far-left) Red Green Party have agreed to abolish the fat tax and cancel the planned sugar tax’
Once the tax is abolished, other policies will need implementing to tackle the problem of obesity and encourage healthy eating, as it continues to be a big problem in this and many other countries. The following articles consider this problem.
Denmark to scrap world’s first fat tax Associated Press (10/11/12)
Denmark to abolish tax on high-fat foods BBC News (10/11/12)
Fat tax repealed The Copenhagen Post (10/11/12)
Businesses call fat tax a failure on all fronts The Copenhagen Post, Ray Weaver (10/11/12)
Questions
- Illustrate the effect of a tax being imposed on a diagram. What happens to equilibrium price and quantity?
- According to Danish authorities, consumers didn’t change their consumption habits with the tax. What does this suggest about the PED of these products?
- How does the amount of tax revenue generated vary with the price elasticity of demand and supply?
- What other policies could be implemented to encourage healthy eating?
- Why did this fat tax lead to higher food prices?
- Explain the way in which such a tax could adversely affect the Danish economy. Does this justify its removal?
