Each January, world political and business leaders gather at the ski resort of Davos in Switzerland for the World Economic Forum. They discuss a range of economic and political issues with the hope of guiding policy.
This year, leaders meet at a time when the global political context has and is changing rapidly. This year the focus is on ‘Creating a Shared Future in a Fractured World’. As the Forum’s website states:
The global context has changed dramatically: geostrategic fissures have re-emerged on multiple fronts with wide-ranging political, economic and social consequences. Realpolitik is no longer just a relic of the Cold War. Economic prosperity and social cohesion are not one and the same. The global commons cannot protect or heal itself.
One of the main ‘fissures’ which threatens social cohesion is the widening gap between the very rich and the rest of the world. Indeed, inequality and poverty is one of the main agenda items at the Davos meeting and the Forum website includes an article titled, ‘We have built an unequal world. Here’s how we can change it’ (see second link in the Articles below). The article shows how the top 1% captured 27% of GDP growth between 1980 and 2016.
The first Guardian article below identifies seven different policy options to tackle the problem of inequality of income and wealth and asks you to say, using a drop-down menu, which one you think is most important. Perhaps it’s something you would like to do.
Articles
Project Davos: what’s the single best way to close the world’s wealth gap? The Guardian, Aidan Mac Guill (19/1/18)
We have built an unequal world. Here’s how we can change it World Economic Forum, Winnie Byanyima (22/1/18)
Oxfam highlights sharp inequality as Davos elite gathers ABC news, Pan Pylas (21/1/18)
Inequality gap widens as 42 people hold same wealth as 3.7bn poorest The Guardian, Larry Elliott (22/1/18)
There’s a huge gender component to income inequality that we’re ignoring Business Insider, Pedro Nicolaci da Costa (22/1/18)
Ahead of Davos, even the 1 percent worry about inequality Washington Post, Heather Long (22/1/18)
“Fractures, Fears and Failures:” World’s Ruling Elites Stare into the Abyss GlobalResearch, Bill Van Auken (18/1/18)
Why the world isn’t getting a pay raise CNN Money, Patrick Gillespie and Ivana Kottasová (1/11/17)
WEF archive
Articles on Inequality World Economic Forum
Questions
- Distinguish between income and wealth. In global terms, which is distributed more unequally?
- Why has global inequality of both income and wealth grown?
- Explain which of the seven policy options identified by the Guardian you would choose/did choose?
- Go through each one of the seven policy options and identify what costs would be associated with pursuing it.
- Identify any other policy options for tackling the problem.
Each year for the past 60 years, the ONS has published ‘Family Spending’, which ‘gives an insight into the spending habits of UK households, broken down by household characteristics and types of spending’. The latest issue, covering the financial year ending 2017, has just been released.
To mark the 60th anniversary, the ONS has also published a blog, Celebrating 60 years of Family Spending, which compares spending patterns in 2017 with those in 1957. The blog looks at the percentage of the family budget spent on various categories, such as food, clothing, housing, tobacco and alcohol. Some of the percentages have changed dramatically over the years; others have hardly changed at all.
Before you read on, of the six categories mentioned above, which do you think have increased, which fallen and which stayed the same? What is your reasoning?
Differences in patterns of consumption partly reflect incomes. In 1957, real household income was £381 in today’s prices; today it’s £544 (43% more). You would expect, therefore, that a greater proportion of household incomes today would be spent on more luxurious goods, with a higher income elasticity of demand.
Other changes in consumption patterns reflect changes in tastes and attitudes. Thus there has been a huge fall in the proportion of household income spent on tobacco – down from 6% in 1957 to 1% in 2017.
Three of the biggest changes over the 60 years have been in housing costs, food and clothing. Housing costs (rent, mortgage interest, council tax, maintenance and home repairs) have doubled from around 9% to around 18% (although they were around 20% before the huge fall in interest rates following the financial crisis of 2007–8). Expenditure on food, by contrast, has fallen – from around 33% to around 16%. Expenditure on clothing has also fallen, from around 10% to around 5%.
Expenditure on alcohol, on the other hand, having risen somewhat in the 1970s and 80s, is roughly the same today as it was 60 years ago, at around 3% of household expenditure.
Some of the explanations for these changing patterns can be found on the supply side – changing costs of production, new technologies and competition; others can be found on the demand side – changes in tastes and changes in incomes. Some goods and services which we use today, such as computers, mobile phones, many other electrical goods, high-tech gyms and social media were simply not available 60 years ago.
Articles
Celebrating 60 years of Family Spending ONS blog, Joanna Bulman (18/1/18)
How did households budget in 1957? BBC News, Simon Gompertz (18/1/18)
Rising burden of housing costs shown by 60-year UK spending survey Financial Times, Gemma Tetlow (18/1/18)
Data
Family spending in the UK: financial year ending 2017 ONS Statistical Bulletin (18/1/18)
All data related to Family spending in the UK: financial year ending 2017 ONS datasets (18/1/18)
Questions
- Why has expenditure on housing increased so much as a proportion of household expenditure? What underlying factors help to explain this?
- Why has expenditure on food fallen as a proportion of household expenditure? Are the explanations on both the demand and supply sides?
- What has happened to the proportion of expenditure going on leisure goods and services? Explain.
- What factors affect the proportion of expenditure going on motoring?
- Of the broad categories of expenditure considered in this blog, which would you expect to increase, which to decrease and which to stay roughly the same over the coming 10 years? Why?
- If expenditure on a particualar good falls as a percentage of total expenditure as income rises, does this make it an inferior good? Explain.
On 15 January 2018, Carillion went into liquidation. It was a major construction, civil engineering and facilities management company in the UK and was involved in a large number of public- and private-sector projects. Many of these were as a partner in a joint venture with other companies.
It was the second largest supplier of construction and maintenance services to Network Rail, including HS2. It was also involved in the building of hospitals, including the new Royal Liverpool University Hospital and Midland Metropolitan Hospital in Smethwick. It also provided maintenance, cleaning and catering services for many schools, universities, hospitals, prisons, government departments and local authorities. In addition it was involved in many private-sector projects.
Much of the work on the projects awarded to Carillion was then outsourced to other companies, many of which are small construction, maintenance, equipment and service companies. A large number of these may themselves be forced to close as projects cease and many bills remain unpaid.
Many of the public-sector projects in which Carillion was involved were awarded under the Public Finance Initiative (PFI). Under the scheme, the government or local authority decides the service it requires, and then seeks tenders from the private sector for designing, building, financing and running projects to provide these services. The capital costs are borne by the private sector, but then, if the provision of the service is not self-financing, the public sector pays the private firm for providing it. Thus, instead of the public sector being an owner of assets and provider or services, it is merely an enabler, buying services from the private sector. The system is known as a Public Private Partnership.
Clearly, there are immediate benefits to the public finances from using private, rather than public, funds to finance a project. Later, however, there is potentially an extra burden of having to buy the services from the private provider at a price that includes an element for profit. What is hoped is that the costs to the taxpayer of these profits will be more than offset by gains in efficiency.
Critics, however, claim that PFI projects have resulted in poorer quality of provision and that cost control has often been inadequate, resulting in a higher burden for the taxpayer in the long term. What is more, many of the projects have turned out to be highly profitable, suggesting that the terms of the original contracts were too lax.
There was some modification to the PFI process in 2012 with the launching of the government’s modified PFI scheme, dubbed PF2. Most of the changes were relatively minor, but the government would act as a minority public equity co-investor in PF2 projects, with the public sector taking stakes of up to 49 per cent in individual private finance projects and appointing a director to the boards of each project. This, it was hoped, would give the government greater oversight of projects.
With the demise of Carillion, there has been considerable debate over outsourcing by the government to the private sector and of PFI in particular. Is PFI the best model for funding public-sector investment and the running of services in the public sector?
On 18 January 2018, the National Audit Office published an assessment of PFI and PF2. The report stated that there are currently 716 PFI and PF2 projects either under construction or in operation, with a total capital value of £59.4 billion. In recent years, however, ‘the government’s use of the PFI and PF2 models has slowed significantly, reducing from, on average, 55 deals each year in the five years to 2007-08 to only one in 2016-17.’
Should the government have closer oversight of private providers? The government has been criticised for not heeding profit warnings by Carillion and continuing to award it contracts.
Should the whole system of outsourcing and PFI be rethought? Should more construction and services be brought ‘in-house’ and directly provided by the public-sector organisation, or at least managed directly by it with a direct relationship with private-sector providers? The articles below consider these issues.
Articles
Carillion collapse: How can one of the Government’s biggest contractors go bust? Independent, Ben Chu (15/1/18)
The main unanswered questions raised by Carillion’s collapse The Telegraph, Jon Yeomans (15/1/18)
Carillion taskforce to help small firms hit by outsourcer’s collapse The Telegraph, Rhiannon Curry (18/1/18)
Carillion Q&A: The consequences of collapse and what the government should do next The Conversation, John Colley (17/1/18)
UK finance watchdog exposes lost PFI billions Financial Times, Henry Mance and George Parker (17/1/18)
PFI not ‘fit for purpose’, says UK provider Financial Times, Gill Plimmer and Jonathan Ford (6/11/17)
Revealed: The £200bn Cost Of ‘Wasteful’ PFI Contracts Huffington Post, George Bowden (18/1/18)
U.K. Spends $14 Billion Per Year on Carillion-Style Projects Bloomberg, Alex Morales (18/1/18)
Carillion may have gone bust, but outsourcing is a powerful public good The Guardian, John McTernan (17/1/18)
PFI deals ‘costing taxpayers billions’ BBC News (18/1/18)
Taxpayers will need to pay £200bn PFI bill, says Watchdog ITV News (18/1/18)
The PFI bosses fleeced us all. Now watch them walk away The Guardian, George Monbiot (16/1/18)
Carillion’s collapse shows that we need an urgent review of outsourcing The Guardian, David Walker (16/1/18)
Carillion collapse: What next for public services? LocalGov, Jos Creese (16/1/18)
Taxpayers to foot £200bn bill for PFI contracts – audit office The Guardian, Rajeev Syal (18/1/18)
Official publications
A new approach to public private partnerships HM Treasury (December 2012)
Private Finance Initiative and Private Finance 2 projects: 2016 summary data GOV.UK
PFI and PF2 National Audit Office (18/1/18)
Questions
- Why did Carillion go into liquidation? Could this have been foreseen?
- Identify the projects in which Carillion has been involved.
- What has the government proposed to deal with the problems created by Carillion’s liquidation?
- What are the advantages and disadvantages of the Private Finance Initiative?
- Why have the number and value of new PFI projects declined significantly in recent years?
- How might PFI projects be tightened up so as to retain the benefits and minimise the disadvantages of the system?
- Why have PFI cost reductions proved difficult to achieve? (See paragraphs 2.7 to 2.17 in the National Audit Office report.)
- How would you assess whether PFI deals represent value for money?
- What are the arguments for and against public-sector organisations providing services, such as cleaning and catering, directly themselves rather than outsourcing them to private-sector companies?
- Does outsourcing reduce risks for the public-sector organisation involved?
The linked articles below look at the state of the railways in Britain and whether renationalisation would be the best way of securing more investment, better services and lower fares.
Rail travel and rail freight involve significant positive externalities, as people and goods transported by rail reduce road congestion, accidents and traffic pollution. In a purely private rail system with no government support, these externalities would not be taken into account and there would be a socially sub-optimal use of the railways. If all government support for the railways were withdrawn, this would almost certainly result in rail closures, as was the case in the 1960s, following the publication of the Beeching Report in 1963.
Also the returns on rail investment are generally long term. Such investment may not, therefore, be attractive to private rail operators seeking shorter-term returns.
These are strong arguments for government intervention to support the railways. But there is considerable disagreement over the best means of doing so.
One option is full nationalisation. This would include both the infrastructure (track, signalling, stations, bridges, tunnels and marshalling yards) and the trains (the trains themselves – both passenger and freight – and their operation).
At present, the infrastructure (except for most stations) is owned, operated, developed and maintained by Network Rail, which is a non-departmental public company (NDPB) or ‘Quango’ (Quasi-autonomous non-governmental organisation, such as NHS trusts, the Forestry Commission or the Office for Students. It has no shareholders and reinvests its profits in the rail infrastructure. Like other NDPBs, it has an arm’s-length relationship with the government. Network Rail is answerable to the government via the Department for Transport. This part of the system, therefore, is nationalised – if the term ‘nationalised organisations’ includes NDPBs and not just full public corporations such as the BBC, the Bank of England and Post Office Ltd.
Train operating companies, however, except in Northern Ireland, are privately owned under a franchise system, with each franchise covering specific routes. Each of the 17 passenger franchises is awarded under a competitive tendering system for a specific period of time, typically seven years, but with some for longer. Some companies operate more than one franchise.
Companies awarded a profitable franchise are required to pay the government for operating it. Companies awarded a loss-making franchise are given subsidies by the government to operate it. In awarding franchises, the government looks at the level of payments the bidders are offering or the subsidies they are requiring.
But this system has come in for increasing criticism, with rising real fares, overcrowding on many trains and poor service quality. The Labour Party is committed to taking franchises into public ownership as they come up for renewal. Indeed, there is considerable public support for nationalising the train operating companies.
The main issue is which system would best address the issues of externalities, efficiency, quality of service, fares and investment. Ultimately it depends on the will of the government. Under either system the government plays a major part in determining the level of financial support, operating criteria and the level of investment. For this reason, many argue that the system of ownership is less important than the level and type of support given by the government and how it requires the railways to be run.
Articles
The case for re-nationalising Britain’s railways The Conversation, Nicole Badstuber (27/8/15)
Lessons from the Beeching cuts in reviving Britain’s railwa The Conversataion, Andrew Edwards (7/12/17)
Britain’s railways were nationalised 70 years ago – let’s not do it again The Conversation, Jonathan Cowie (1/1/18)
FactCheck Q&A: Should we nationalise the railways? Channel 4 News, Martin Williiams (18/5/17)
Britain’s railways need careful expansion, not nationalisation Financial Times, Julian Glover (5/1/18)
Right or wrong, Labour is offering a solution to the legitimacy crisis of our privatised railways Independent. Ben Chu (2/1/18)
Whether or not nationalisation is the answer, there are serious questions about the health of Britain’s railways Independent. Editorial (2/1/18)
Why Nationalising The Railways Is The Biggest Misdirect In Politics Huffington Post, Chris Whiting (5/1/18)
Questions
- What categories of market failure would exist in a purely private rail system with no government intervention?
- What types of savings could be made by nationalising train operating companies?
- The franchise system is one of contestable monopolies. In what ways are they contestable and what benefits does the system bring? Are there any costs from the contestable nature of the system?
- Is it feasible to have franchises that allow more than one train operator to run on most routes, thereby providing some degree of continuing competition?
- How are rail fares determined in Britain?
- Would nationalising the train operating companies be costly to the taxpayer? Explain.
- What determines the optimal length of a franchise under the current system?
- What role does leasing play in investment in rolling stock?
- What are the arguments for and against the government’s decision in November 2017 to allow the Virgin/Stagecoach partnership to pull out of the East Coast franchise three years early because it found the agreed payments to the government too onerous?
- Could the current system be amended in any way to meet the criticisms that it does not adequately take into account the positive externalities of rail transport and the need for substantial investment, while also encouraging excessive risk taking by bidding companies at the tendering stage?
UK CPI inflation rose to 3.1% in November. This has forced Mark Carney to write a letter of explanation to the Chancellor – something he is required to do if inflation is more than 1 percentage point above (or below) the target of 2%.
The rise in inflation over the past few months has been caused largely by the depreciation of sterling following the Brexit vote. But there have been other factors at play too. The dollar price of oil has risen by 32% over the past 12 months and there have been large international rises in the price of metals and, more recently, in various foodstuffs. For example, butter prices have risen by over 20% in the past year (although they have declined somewhat recently). Other items that have seen large price rises include books, computer games, clothing and public transport.
The rate of CPI inflation is the percentage increase in the consumer prices index over the previous 12 months. When there is a one-off rise in prices, such as a rise in oil prices, its effect on inflation will only last 12 months. After that, assuming the price does not rise again, there will be no more effect on inflation. The CPI will be higher, but inflation will fall back. The effect may not be immediate, however, as input price changes take a time to work through supply chains.
Given that the main driver of inflation has been the depreciation in sterling, once the effect has worked through in terms of higher prices, inflation will fall back. Only if sterling continued depreciating would an inflation effect continue. So, many commentators are expecting that the rate on inflation will soon begin to fall.
But what will have been the effect on real incomes? In the past 12 months, nominal average earnings have risen by around 2.5% (the precise figures will not be available for a month). This means that real average earnings have fallen by around 0.6%. (Click here for a PowerPoint of the chart.)
For many low-income families the effect has been more severe. Many have seen little or no increase in their pay and they also consume a larger proportion of items whose prices have risen by more than the average. Those on working-age benefits will be particularly badly hit as benefits have not risen since 2015.
If inflation does fall and if real incomes no longer fall, people will still be worse off unless real incomes rise back to the levels they were before they started falling. That could be some time off.
Articles
UK inflation rate at near six-year high BBC News (12/12/17)
Inflation up as food costs jump – and gas crisis threatens worse to come The Telegraph, Tim Wallace (12/12/17)
UK worst for pay growth as rich world soars ahead in 2018 The Telegraph, Tim Wallace (12/12/17)
Inflation rises to 3.1%, adding to UK cost of living squeeze The Guardian, Larry Elliott (12/12/17)
UK inflation breaches target as it climbs to 3.1% Financial Times, Gavin Jackson (12/12/17)
Inflation surges to 3.1% in November, a near six-year high Belfast Telegraph (12/12/17)
Data
CPI annual rate of increase (all items) ONS: series D7G7
Average weekly earnings, annual (3-month average) ONS: series KAC3
UK consumer price inflation: November 2017 ONS Statistical Bulletin (12/12/17)
Commodity prices Index Mundi
Questions
- Apart from CPI inflation, what other measures of inflation are there? Explain their meaning.
- Why is inflation of 2%, rather than 0%, seen as the optimal rate by most central banks?
- Apart from the depreciation of sterling, what other effects is Brexit likely to have on living standards in the UK?
- What are the arguments for and against the government raising benefits by the rate of CPI inflation?
- If Europe and the USA continue to grow faster than the UK, what effect is this likely to have on the euro/pound and dollar/pound exchange rates? What determines the magnitude of this effect?
- Unemployment is at its lowest level since 1975. Why, then, are real wages falling?
- Why, in the light of inflation being above target, has the Bank of England not raised Bank Rate again in December (having raised it from 0.25% to 0.5% in November)?
