The Budget takes place on 17th March 2015 and as always there is much speculation as to what it will and won’t include. One industry that is eagerly awaiting Osborne’s Budget is the North Sea oil and gas industry. Tax cuts and rises may well play a key role in the Budget, but this is one sector where a possibly large tax cut is expected.
The tax paid by this industry is very high compared to others, potentially reaching 80%. The tax rate was increased some years ago and it is now thought that it may come back down. One key factor is oil prices: with such huge decreases in the price of oil relative to when the tax on the industry was increased, the industry is now asking for these tax rises to be reversed. The industry has suggested that a 10% tax cut is a possibility and this would make a big difference for the industry.
Danny Alexander, the chief secretary to the Treasury, said:
“We’ve been very clear that the direction of travel for tax in the North Sea needs to be downwards … And that needs to be even stronger given the low oil price we see at the moment. We want people to have the confidence to invest for the long term future of the North Sea … And so George Osborne and I have been listening very carefully to what the industry has been saying …People will have to wait and see what we say on Wednesday [Budget day], but I hope very much that it will give the North Sea that confidence that we all want to see for one of Britain’s most important industries.”
We may also see further changes for this industry, such as allowances to encourage further investment, as costs of investment are extremely high and this has led to many years of under-investment. These changes are hoped to regenerate this industry. Any change in tax allowances or tax rates will have an impact on tax revenue and it is not necessarily the case that an increase in tax will lead to a rise in revenue or a fall in revenue. The relationship between tax rates and tax revenues can be very complex. The following articles consider this particular issue and what the Budget will do for this industry.
North sea oil groups set for tax breaks in budget Financial Times, Christopher Adams and George Parker (16/3/15)
What does the Budget 2015 mean for the North sea oil industry? The Telegraph, Andrew Critchlow (16/3/15)
Britain needs oil tax cuts to attract North Sea Investment Reuters, Karolin Schaps and Claire Milhench (16/3/15)
Treasury paves way for major tax cut for North sea BBC News, Kamal Ahmed (16/3/15)
Home of Brent Oil benchmark seeks help as investment slumps Bloomberg, Firat Kayakiran (17/3/15)
Questions
- If a tax is imposed on an industry, what type of effect might this have on costs of production? Use a diagram to support your answer.
- In the BBC News article, North Sea Oil is referred to as a cash cow. What does this mean?
- If taxes are cut for the North Sea Oil industry, how will this affect its costs and what might it doe for investment?
- What will happen to tax revenues if taxes are cut? Use the Laffer curve to help your answer.
- How has the North Sea Oil industry been affected by falling oil prices? Does this offer a justification for a tax cut?
Ever been to the cinema and found it almost empty? And then wondered why you paid the full price? Perhaps you’ve taken advantage of Orange Wednesday or only go if there’s a particularly good film on? Often it might be cheaper to wait until the film is out on DVD!
Going to the cinema can be an expensive outing. The ticket, the popcorm, a drink, ice cream – it all adds up! Orange Wednesday has recently disappeared and this will definitely have an impact on consumption of movies at your local Odeon, Vue or Showcase. The impact will be on how many seats are left empty.
However, a new app could be set to generate revenues for the cinema and provide cheaper entertainment for your everyday consumer. This new app will allow cinemas to send out alerts to people in the local area advising them that a screening will have many empty seats. What’s the incentive? Perhaps a discount, or some food. But, why would they do such a thing?
If a movie is being shown at a cinema, there will be a large fixed cost. However, what happens as each additional consumer enters the theatre? Does the cost to the cinema rise? Perhaps there is a small cost with more cleaning required, but the additional cost of actually showing the film if there 11 rather than 10 people is almost (if not equal to) zero. That is, the marginal cost of an extra user is zero. Therefore, if there is a screening with many empty seats, wouldn’t the cinema be better to offer the seats for half price. After all, if you can earn £5 from selling a ticket and the additional cost is almost zero, then it’s better to sell it for £5 than not sell it for £10! The following article and video from BBC News considers this new app and other strategies to maximise cinema usage!
Apps in pockets, bums on cinema seats BBC News, Dave Lee (27/2/15)
Questions
- What would the budget constraint look like for a cinema where a discount was offered if you purchased two cinema tickets and then received the third ticket for half price?
- Why is the marginal cost of an extra user at the cinema almost zero?
- If the MC = 0, does this mean that a cinema is a public good?
- How will this new app allow a cinema to increase total revenue and profit?
- If it is cheaper to buy a DVD rather than go to a cinema, why do people still go to the cinema?
House prices are always a good signal for the strength or direction of the economy. While there will always be certain areas that are more sought after than others and such differences will be reflected in relative house prices, the regional divide that we currently see in the UK is quite astonishing.
Prior to the financial crisis, house prices had been rising across the county, but in the year following the financial crisis, they declined by 19 per cent. It was only in 2013, when prices began to increase and, perhaps more importantly, when the variation in regional house prices began to increase significantly. In mid-2014, the UK’s annual house price inflation rate was 11.7 per cent, but the rates in London and the South East were 19.1 and 12.2 per cent, respectively. Elsewhere in the UK, the average rate was 7.9 per cent.
These regional differences have continued and figures show that the current differential between the cheapest and most expensive regional average house price is now over £350,000. In particular, data from the Land Registry shows that the average house price in London is £458,283, while in the North East, it is only £97,974.
Those people who own a house in London have benefited from such high house prices, in many cases finding that their equity in their house has grown significantly. Furthermore, any home-owners selling their house in London and moving elsewhere are benefiting from lower house prices outside London.
However, most first-time buyers looking for a house in London are being competed out of the market, finding themselves unable to gain a mortgage and deposit for the amount that they require. The opposite is, of course, happening in other parts of the country. First-time buyers are more able to enter the property market, but home-owners are finding that they have much less equity in their house.
This has also caused other problems, in particular in the labour market. Workers who are moving to jobs in London are finding the house price differentials problematic. Although wage rates are often higher in London than in other parts of the country, the house price differential is significantly bigger. This means that if someone is offered a job in London, they may find it impossible to find a house of similar size in London compared to where they had been. After all, an average family home in the North East can be purchased for under £100,000, whereas an average family home in London will cost almost £500,000.
The housing market is problematic because of particular characteristics.
Supply tends to be relatively fixed, as it can take a long time to build new houses and hence to boost supply. Furthermore, the UK has a relatively dense population, with limited available land, and so planning restrictions have to be kept quite tight, which is another reason why supply can be difficult to increase.
On the demand-side, we are seeing a change in demographics, with more single-person households; people living longer; second home purchases and many other factors. 
These things tend to push up demand and, with restricted supply, house prices rise. Furthermore, with certain areas being particularly sought after, perhaps due to greater job availability, ease of commuting, schools, etc., house price differentials can be significant.
The Conservatives, together with the other main parties, have promised to build more houses to help ease the problem, but this really is a long-run solution.
The Bank of England will undoubtedly have a role to play in the future of the housing market. The affordability of mortgages is very dependent on interest rate changes by the Bank’s Monetary Policy Committee.
Although house prices in London have recently fallen a little, the housing cost gap between living in London and other areas is unlikely to close by much as long as people continue to want to live in the capital. The following articles consider the housing market and its regional variations.
Articles
London’s homeowners have made £144,000 on average since 2009 International Business Times, Sean Martin (20/2/15)
Wide gap in regional house prices, Land Registry figures show BBC News, Kevin Peachey (27/2/15)
Mapped: 10 years of Britain’s house price boom (and bust) The Telegraph, Anna White (27/2/15)
Oxford houses less affordable than London Financial Times, Kate Allen (26/2/15)
January’s UK house prices show unexpected climb The Guardian (5/2/15)
House prices since 2008: best and worst regions The Telegraph, Tom Brooks-Pollock (22/8/14)
House prices hit new record high of £274k with six regions now past pre-crisis peak – but the North lags behind This is Money, Lee Boyce (14/10/14)
Data
House price indices: Data Tables ONS
Links to sites with data on UK house prices Economic Data freely available online, The Economics Network
Regional House Prices Q4 2014 Lloyds Banking Group
Questions
- What are the main factors that determine the demand for housing? In each case, explain what change would shift the demand curve for housing to the right or the left.
- Which factors determine supply? Which way will they shift the supply curve?
- Put the demand and supply for housing together and use that to explain the recent trends we have seen in house prices.
- Use your answers to question 1 – 3 to explain why house prices in London are so much higher than those in the North East of England.
- Why are interest rates such an important factor in the housing market?
- Explain the link between house prices and the labour market.
- Do you think government policy should focus on reducing regional variations in house prices? What types of policies could be used?
Most observers were once again left stunned by how much media companies are willing to pay to secure the rights to broadcast live games in the English Premier League (EPL). At the same time the method used to sell those rights is being investigated by Ofcom following complaints made by Virgin Media. Virgin Media actually requested that the auction was halted until the investigation was completed.
Between them, BSkyB and BT Sport have paid £5.136bn to purchase the rights to broadcast live matches in the EPL over a three-year period beginning in the 2016–17 season. This is a 71% increase in the price paid for the previous three-year deal which runs from 2013 to 2016 and cost £3.018bn. However, the headline figure hides some big differences between the amounts paid by the two companies.
How exactly are the rights sold? The broadcast rights for the 168 live matches are split up into seven different packages labelled A through to G and are placed in seven different auctions. The type of auction used by the EPL is a sealed bid auction. Interested companies are invited to make an offer for any of the packages. However, when they make a bid they do not know (a) if other firms have also made a bid and (b) the size of any other bids. Another constraint is that one firm is not allowed to win more than five of the auctions. When the auction finishes the EPL only releases information about the winning offers. It never provides information about any of the failed bids.
Some of the packages are worth more than others to the broadcasters. The first five packages (A–E) each contain the rights for 28 games per season, while the other two packages (F and G) contain the rights for 14 matches. In some of the packages all of the games kick off at the same time and on the same day. For example all 28 games in package ‘A’ kick off at 12.30pm on a Saturday. Others contain more of a mixture. Some of the games in Package E take place on a Monday evening. while others take place on a Friday evening. Given the potential advertising revenue and number of viewers, the most valuable package is D, which has 28 games that kick off at 4.00pm on a Sunday.
Another factor that influences the value of a package is the number of ‘first picks’. In any given week, more than one broadcaster might want to screen the same match. To overcome this problem, each package is allocated a number of first, second, third, fourth and fifth ‘picks’. For example, package D comes with 18 first and 10 fourth round picks. This means that whichever company wins this package will get first choice on the games they want to broadcast on 18 occasions a year. Package C contains no ‘first picks’ but offers 15 second, 4 fourth and 7 fifth round picks. There is also a maximum and a minimum limit on the number of times games including a specific team can be broadcast.
BSkyB won the auctions for packages A, C, D, E and G for a price of £4.17bn. This means that it will be paying £1.396bn to broadcast 126 live games per season. This is an average payment of £11,031,700 per game. In the previous deal it paid £760million for the rights to broadcast 116 live games per season. This is an average payment of £6,551,724 per game. The new deal represents a cost increase of 68% per game. However, the number of first picks BskyB has secured in the new deal increases from 20 to 26.
BTSport won the auctions for packages B and F for a price of £960m. This means that it will be paying £320m for the rights to broadcast 42 live games per season. This is an average payment of £7,619,048 per game. In the previous deal it paid £246 million per year for the rights to broadcast 38 live games per season. This is an average payment of £6,473,684 per game. The new deal represents an increase in costs of 17.7% per game for BT Sport – a much lower figure than for BSkyB.
BSkyB has stated that it will cover the increase in the price it has paid for the rights with efficiency savings. However, many observers believe that it will ultimately result in significant increases in the subscription rates for SkySports. The impact of the deal on BskyB’s profit may well depend on the willingness of its customers to pay higher prices. What is the price elasticity of demand for SkySports at the current subscription rates they are charging?
There is still some uncertainty about the deal following Ofcom’s decision to investigate the legitimacy of the method used by the EPL to auction the rights. Virgin Media made a formal complaint in September 2014 about the collective selling of the live broadcast rights and argued that it was in breach of competition law. The investigation by Ofcom will make a judgment about whether the joint selling of the rights by the EPL is a contravention of Chapter I of the Competition Act 1998 and/or Article 101(1) of the Treaty on the Functioning of the European Union. An initial announcement will be made in March.
Premier League set to announce record £4.4bn TV rights deal BBC Sport (10/2/15)
Premier League TV rights: What does deal mean for fans & clubs BBC Sport, Ben Smith (11/2/15)
How Sky paid £4m more per Premier League match than BT The Telegraph, Ben Rumsby (11/2/15)
Premier League TV deal: Windfall must benefit grass roots and England The Telegraph, Henry Winter (10/2/15)
Sky and BT retain Premier League TV rights for record £5.14bn The Guardian, Owen Gibson (10/2/15)
Premier League TV rights: Sky Sports and BT Sport win UK broadcasting rights as price tops £5billion Independent, Tom Peck (10/2/15)
Questions
- Draw a demand curve for package A and package D of the live broadcast rights. Which one do you think will be furthest to the right? Explain your answer.
- What are the potential benefits to the EPL of not revealing the details of any of the losing bids?
- Explain how the price elasticity of demand is a useful concept for assessing the impact of the new deal on the profits of BSkyB and BTSport.
- Given the impact of the new deal of the size of Parachute payments, what impact might it have on the level of competitive balance in the Championship?
- Find out the key provisions of Chapter I of the Competition Act 1998 and Article 101(1) of the Treaty on the Functioning of the European Union.
In the UK, we take it for granted that if you need to see a doctor, you go and give little, if any thought, to the cost. It may be petrol costs, time off work or the cost of a prescription, but beyond that, receiving treatment is free at the point of use. Funded through a progressive tax system, the NHS is seen as being one of the more equitable health care systems.
When a mother gives birth, the main thing she will have to worry about is the labour – and not whether to have certain painkillers or stay an extra night, because of the cost.
The International Federation of Health Plans (IFHP) looked at data on the cost of giving birth, based on insurance company payments. For someone living in the UK, the figures make for quite astonishing reading. In the USA, a normal delivery will cost $10,000, while a caesarean totals $15,000, meaning that giving birth in the USA is the most expensive place in the world. The article linked below takes the case of Mari Roberts, whose total delivery bill came to over $100,000. The insurance did cover it, but that’s not always the case. Medical bills in the United States are one of the leading reasons for bankruptcy and with these types of figures, perhaps it’s hardly surprising.
Other countries also see high costs for delivery, where expectant mothers really do need to give consideration to the length of their stay in hospital and perhaps even whether they are willing to forgo a pain-relieving drug and save some money. There is often said to be an efficiency–equity trade-off in the area of healthcare, with countries offering a free at the point of use service delivering an equitable system, but with a lack of responsiveness to the demands of the patients. In the UK, you don’t pay to see a doctor but, with a ‘free’ service, demand is understandably very high, thus creating a shortage and waiting lists. In countries, such as the USA, a higher price for treatment does limit demand, creating more inequity but a responsive system.
There are certainly lessons that can be learned from all health care systems and living in a developed country, we should certainly consider ourselves lucky. There are many countries where access to even the most basic health care is a luxury that most cannot afford. So, where does have the best health care system? I’ll leave that to you.
Video and article
How much do women around the world pay to give birth? BBC News, Mariko Oi (13/2/15)
Report
Research for Universal Health Coverage, World Health Report 2013 World Health Organisation August 2013
Health Systems Financing: The Path to Universal Coverage, World Health Report 2010 World Health Organisation August 2010
Questions
- Using a demand and supply diagram, explain why there may be a trade-off between efficiency and equity.
- If there is over-consumption of a service such as health care, does this suggest that the market fails?
- What are the main market failures that exist in health care?
- Is the concept of opportunity cost relevant to mothers in labour? Think about the country in question.
- How would you go about ranking health care systems if you worked for an organisation such as the OECD or WHO?
- Pick a country whose health care system you are familiar with. What changes have occurred to the way in which health care is organised and financed in this country? How has it affected the key objectives that formed part of your answer to question 5?
The Budget takes place on 17th March 2015 and as always there is much speculation as to what it will and won’t include. One industry that is eagerly awaiting Osborne’s Budget is the North Sea oil and gas industry. Tax cuts and rises may well play a key role in the Budget, but this is one sector where a possibly large tax cut is expected.
