There is a huge hole in public finances that needs to be filled and protestors are arguing that part of the deficit can be financed by companies that manage to avoid or indeed evade taxation. Sunday 30th January was marked by many as the day of action against this alleged tax avoidance by companies who choose to register in so-called tax havens. These countries offer much lower tax rates and hence provide an attractive environment for companies and savers.
However, protests by the campaign group Uncut have been targeting companies such as Boots, Vodafone and Top Shop, accusing them of depriving the UK economy of billions of pounds of tax revenue, which could be used to plug the hole in Britain’s finances and put the economy on the road to recovery. While these concerns have been around for a long time, they have been brought to the forefront by the government’s spending cuts in areas such as higher education, public sector pensions and the planned closures of libraries. There are numerous strikes planned by workers facing job losses, pay cuts and pension cuts. However, George Osborne has said:
“I regard these people as the forces of stagnation, when we are trying to get the British economy competitive again, moving forward again.”
With more and more spending cuts expected and households being squeezed could this tax avoidance really fill the gap? It is not known how much tax revenue is lost through tax avoidance and evasion, but HM Revenue and Customs estimated that the size of the tax gap could lie somewhere between £3.7 billion and £13 billion. The Commons Public Accounts Committee estimated a gap of £8.5 billion and the TUC at around £12 billion. A pretty wide divergence on estimates I grant you, but an indication of the sheer volume and value of tax avoidance that takes place. Clamping down on this may not plug the hole, but it would certainly help!
Analysis: UK Uncut- The true costs of tax avoidance Ethical Corporation 2009 (28/1/11)
Tax protestors stage Boots sit-in The Press Association (30/1/11)
Weekend of protests planned over tax cuts Guardian, Matthew Taylor and Jessica Shepherd (28/1/11)
Unions are “forces of stagnation”, says Osborne BBC News (28/1/11)
Day of action against tax avoiders The Press Association (28/1/11)
Firms’ secret tax avoidance schemes cost UK billions Guardian, Tax Gap Reporting Team (2/2/09)
Questions
- Why is the UK running such a large budget deficit?
- What is the point of tax avoidance?
- What are the arguments for companies such as Boots registering in other countries? Are these reasons ever in the interests of consumers?
- How are companies able to reduce their tax burdens by registering in countries like Switzerland?
- Why does George Osborne argue that trade unions and strike action are the ‘forces of stagnation’?
- What are the costs of striking to (a) workers, (b) consumers, (c) firms and (d) the economy?
- Would clamping down on tax avoidance be of benefit to the UK economy in the short and long run?
The world’s population is set to go on rising – at least to 2050. And as population rises, so will the demand for food. But here we come up against a potentially catastrophic illustration of the law of diminishing returns. Population is set to grow, but the world supply of land is pretty well fixed. And with global warming, some land may become unusable.
According to Sir John Beddington, an expert in population biology and lead author of a government-commissioned report, The Future of Food and Farming, there could be serious consequences of this population rise, including rapid rises in the demand for food, rising food prices, rising land prices, the degradation of land, growing food poverty in many developing countries, growing political unrest and serious environmental damage. As the report’s Executive Summary states:
The global food system will experience an unprecedented confluence of pressures over the next 40 years. On the demand side, global population size will increase from nearly seven billion today to eight billion by 2030, and probably to over nine billion by 2050; many people are likely to be wealthier, creating demand for a more varied, high-quality diet requiring additional resources to produce. On the production side, competition for land, water and energy will intensify, while the effects of climate change will become increasingly apparent. The need to reduce greenhouse gas emissions and adapt to a changing climate will become imperative. Over this period globalisation will continue, exposing the food system to novel economic and political pressures.
Any one of these pressures (‘drivers of change’) would present substantial challenges to food security; together they constitute a major threat that requires a strategic reappraisal of how the world is fed.
The report specifically looks at five key challenges for the future:
A. Balancing future demand and supply sustainably – to ensure that food supplies are affordable.
B. Ensuring that there is adequate stability in food prices – and protecting the most vulnerable from the volatility that does occur.
C. Achieving global access to food and ending hunger – this recognises that producing enough food in the world so that everyone can potentially be fed is not the same thing as ensuring food security for all.
D. Managing the contribution of the food system to the mitigation of climate change.
E. Maintaining biodiversity and ecosystem services while feeding the world.
So what can be done and how realistic are the policy solutions? The following broadcasts and articles examine the arguments
Webcasts and podcasts
Articles
Report
Questions
- Summarise the main findings of the report.
- Does increasing the output of food per agricultural worker contradict the law of diminishing returns? Explain.
- What are the current failings of the system of global food supply?
- Why are problems of food supply likely to intensify?
- What externalities are involved in global food production? What impact do these have?
- In what ways might the externalities be internalised?
- What are the benefits and dangers of new technologies as means of increasing food supply?
- To what extent do the goals of increasing food supply and environmental sustainability conflict with each other?
- Explain the main drivers of change that affect food supply and demand? In what ways do these drivers interact with each other?
- “Although the challenges are enormous there are real grounds for optimism.” Explain the report’s authors’ thinking here.
The recession caused a large rise in unemployment in many countries. In the USA the rise has been particularly steep, where unemployment now stands at 14.5 million, or 9.8% of the labour force. Unemployment has continued to rise despite renewed growth in the US economy, where the latest annual real GDP growth is 2.6% (measured in Q3 2010). The rise in unemployment has been blamed on ‘sticky wages’ – i.e. the reluctance of wage rates to fall.
But are wages genuinely sticky as far as the average worker is concerned? They may be in many specific jobs with specific employers, but many workers made redundant then find work in different jobs at lower rates of pay. For them, their wage has fallen, even if particular jobs are paying the same as before.
So what are the consequences of this? Does the willingness of workers to accept lower paid jobs mean that the labour market is flexible and that people will thus price themselves into work? If so, why is employment still rising? Or does a reduction in real wages for many people dampen spending and hence aggregate demand, thereby reducing the demand for labour? If so, why is GDP rising?
The following articles look at the apparent stickiness of wages and the implications for the labour market and the macroeconomy.
Articles
Downturn’s Ugly Trademark: Steep, Lasting Drop in Wages Wall Street Journal, Sudeep Reddy (11/1/11)
The Causes of Unemployment Seeking Alpha, Brad DeLong (13/1/11)
Sticky, sticky wages The Economist blogs: Free Exchange, R.A. (11/1/11)
The Causes of Unemployment New York Times blogs: Wonkish, Paul Krugman (16/1/11)
America’s union-bashing backlash Guardian, Paul Harris (5/1/11)
Data
Federal Reserve Economic Data: FRED Federal Reserve Bank of St. Louis (US macroeconomic datasets)
United States GDP Growth Rate Trading Economics
US unemployment statistics Bureau of Labor Statistics
Questions
- Why might nominal wages be sticky downwards in specific jobs in specific companies?
- Why might nominal average wages in the economy not be sticky downwards?
- Why is unemployment rising in the USA?
- Why might there be a problem of hysteresis in the USA that provides an explanation of the reluctance of unemployment to fall?
- Why might a fall in wages end up being contractionary?
- What lessons can be learned from the Great Depression about cures for unemployment?
- How might unemployment be brought down in the USA?
- Why may making wages somewhat more flexible, as opposed to perfectly flexible, not be a good thing?
Here’s an interesting example of oligopoly – one you probably haven’t considered before. It’s the art market. And it’s not just one market, but a whole pyramid of markets. At the bottom are the ‘yearning masses’ of penny-poor artists, from students to those struggling to make a living from their art, with studios in their attic, garden shed or kitchen table. At the top of the pyramid are those very few artists that can earn fantastic sums of money by selling to collectors or top galleries. Then there are all the layers of markets in between, where artists can earn everything from a modest to a reasonable income.
The pyramid is itself depicted as a work of art, which you can see in the linked article below. It’s worth studying this piece of art carefully as well as reading the article.
A guide to the market oligopoly system Reuters, Felix Salmon (28/12/10)
Questions
- Identify the increasing barriers to entry as you work up the art market pyramid.
- Are there any other market imperfections in the art market that you can identify from the diagram?
- What are the key differences between the ‘primary market, tier 1’, the ‘primary market, tier 2’ and ‘the secondary market’?
- Are artists ‘rational maximisers’? If so, what is it they are trying to maximise? If not, why not?
- How would you set about determining the ‘worth’ of a piece of art? How do possible future value of a piece of art determine its present value?
Two reports released by Incomes Data Services tell dramatically contrasting stories about pay in the UK. One report focuses on average pay in the public and private sectors, which are both likely to fall in real terms in 2011. Most public-sector workers will see a freeze in their wages and, whilst private-sector workers’ pay could rise by an average of 3%, this will still be below the rate of inflation. The press release Pay awards may rise but will trail inflation (6/1/11) to the report stated that:
Private sector pay settlements in 2011 could well be higher than in 2010, as long as the economic recovery remains on track. But following the latest increase in VAT, they are likely to trail inflation, meaning that the cost of living may be set to rise faster than average pay settlements for the second year running.
However, the press release to an earlier report, FTSE-100 bosses see earnings rise 55% (29/10/10), stated that:
FTSE-100 directors saw their total earnings boosted by an average of 55% while across the FTSE 350 as a whole total board pay went up by an average 45%, according to the latest Directors Pay Report, published by Incomes Data Services. (Year to June 2010)
On the back of these increases FTSE 100 chief executives took home £4.9 million on average in total earnings during the year.
Meanwhile, there is continuing public outcry over the levels of bank pay and bonuses. Despite billions of pounds of public money having been poured into banks to prevent their collapse, bank bosses are set to receive huge remuneration packages worth several million pounds in some cases. And, despite being condemned by the government, it seems there is little it can do to curb them.
So what are the causes of the growing income divide between those at the top and everyone else? And what are the economic consequences? The following articles explore the issues.
Articles: IDS reports
Year of pain predicted for workers.. while bosses’ salaries continue to grow Daily Record, Magnus Gardham (7/1/11)
Another 12 months of pay freeze misery for workers… but bosses enjoy a huge 55% salary increase Daily Mail, Becky Barrow (6/1/11)
Private-sector pay set to trail behind inflation People Management, Michelle Stevens (6/1/11)
Private pay deals to lag behind inflation Financial Times, Brian Groom (6/1/11)
UK boardroom pay rises 55% in an age of austerity Guardian, Simon Goodley and Graeme Wearden (29/10/10)
Private sector pay ‘to trail inflation’ in 2011 BBC News (6/1/11)
Staff morale warning over bosses’ pay rises Independent, Jon Smith (6/1/11)
‘Dose of reality’ call over top pay BBC Today Programme, Robert Peston, Brendan Barber and Garry Wilson (6/1/11)
‘Severe squeeze’ on average pay BBC Today Programme, Ken Mulkearn (Editor of the Incomes Data Services pay review) (6/1/11)
UK inflation rate rises to 3.7% BBC News , Ian Pollock (18/1/11)
Articles: bankers’ bonuses
Bank bonuses ‘to run to billions in 2011’ BBC News, (7/1/11)
Cameron says banks ‘should pay smaller bonuses’ BBC News, (9/1/11)
David Cameron warns RBS over bonuses Guardian, (9/1/11)
Banks say ‘no’ to bonus backdown Management Today, Andrew Saunders (7/1/11)
Banks to pay out billions in bonuses BBC News blogs: Peston’s Picks, Robert Peston (6/1/11)
Why government can’t stop big bonus payments BBC News blogs: Peston’s Picks, Robert Peston (7/1/11)
Diamond: ‘I am compelled to pay big bonuses’ BBC News blogs: Peston’s Picks, Robert Peston (11/1/11)
Data
Average Weekly Earnings Incomes Data Services
Questions
- Why are average earnings likely to be less than the rate of inflation in 2011?
- Why were the directors of the FTSE 100 companies paid an average 55% pay increase for the year to October 2010?
- To what extent can marginal productivity theory explain the huge increases of bosses of top companies?
- If remuneration committees base executive pay increases on the average of the top 25% of increases of equivalent people in other companies (to stop ‘poaching’), what will be the implications for executive pay rises over time?
- What market failures are there in determining executive pay?
- What will be the implications for staff morale if their earnings are falling in real terms while their bosses are receiving huge pay increases? Should these implications be taken into account when deciding executive remuneration packages?
- Are shareholders in FTSE 100 companies likely to welcome the pay increases of their top executives? If so, why? If not, why not?