Throughout 2009/10, a new millionaire was created in Brazil every 10 minutes – not bad for a developing country! Despite the global recession, Brazil has managed growth of almost 5% and is set to overtake both the UK and France to become the world’s 5th largest economy. Brazil will hold the next World Cup and the Olympic games after London, bringing it further recognition as a global power. It has the third largest aircraft manufacturing industry in the world and is even doing its bit to tackle climate change, with 50% of its cars running on bio-fuels. It exports more meat than any other country and is looking to become an energy power. With falling unemployment, a buoyant economy, growing confidence, fantastic beaches and 6 millionaires created every hour, Brazil looks like the perfect place to live.
However, that is just one side of the story. Brazil is still a country with deep poverty – approximately 60 million people. The slums, or favelas, are home to 1 million people in Rio alone, where unemployment is high and drug wars common. There has been a concerted effort to reduce the drug trafficking business, but this has only created more unemployment. There is little sanitation, poor electricity and minimal chance of escape. Neighbourhoods need rebuilding, and despite high growth and arguably the most popular president in the world (Lula da Silva), there are calls for political, social, taxation and labour market reforms. This cycle of poverty and the equality gap needs addressing before the Brazilian economy can really be considered a global power.
Webcasts and podcasts
Will Brazil’s economy keep growing? BBC News, Matt Frei (27/5/10)
Brazil’s bid to be ‘world’s breadbasket’ BBC World News America, Paulo Cabral (26/5/10)
Tackling Brazil’s poverty BBC World News America, Gary Duffy (28/5/10)
Brazil’s development spurs economic quality hopes BBC World News America, Matt Frei (27/5/10)
Brazil’s air industry takes off BBC World News America, Paolo Cabral (24/5/10)
‘Our growth quality is better than China’ BBC World News America, Marcelo Neri (25/5/10)
Brazilian economy poised to overtake UK’s BBC News Today, Matt Frei (27/5/10)
Data
Economic data Banco Central do Brasil
Brazil Economy EconomyWatch
Brazil CIA World Factbook
Brazil Geognos
Brazil data World Bank
Questions
- What are the main causes of (a) inequality and (b) poverty in an economy? What is the difference between these concepts?
- How does the government subsidised housing programme aim to help low income households. Use a diagram to illustrate the effect.
- What policies can be used to reduce the equality gap?
- Are those living in the favelas in absolute poverty? How do we distinguish between absolute and relative poverty? Is it the same across the world?
- What are the adverse effects of fast growth in Brazil?
Over the past 13 years of the Labour government, the incomes of the richest 1 per cent in the UK have grown substantially faster than that of other income groups, as they also did under the previous Conservative governments from 1979 to 1997. But, thanks to complex redistributive policies, including tax credits, the rise in relative poverty that occurred in the 1980s and 90s has been arrested. With the exception of the top 1 per cent, disposable income growth has been similar across the income groups.
As Larry Elliott, the Guardian’s Economics editor argues:
During the Thatcher-Major years, real incomes for the richest fifth of the population rose fastest, averaging growth of about 2.5% a year. The next richest quintile did a little less well, the middle 20% a bit less well still, and so on all the way down to the poorest 20% of the population, which saw the smallest real income gains of less than 1% a year.
Under Labour, the very high rewards secured by the top 1% of earners has obscured an even distribution of real income growth across the five quintiles.
The new coalition government maintains that anti-poverty policies have failed:
… Iain Duncan Smith, the work and pensions secretary, made a statement trashing Labour’s record: “Vast sums of money have been poured into the benefits system over the last decade in an attempt to address poverty, but today’s statistics clearly show that this approach has failed. Little progress has been made in tackling child poverty, society is more unequal than 50 years ago and there are more working age people living in poverty than ever before.
A new approach is needed which addresses the drivers behind poverty and actually improves the outcomes of the millions of adults and children trapped in poverty.”
The following articles explore what has been happening to inequality and poverty and look at the policies proposed by the coalition government. The data on inequality are also given, along with commentary on them by the Institute for Fiscal Studies
Articles
Labour’s poverty record may be flawed, but the damage was done by the Tories Guardian, Larry Elliott (24/5/10)
The distribution of income: For richer, for poorer Guardian editorial (24/5/10)
What the poverty figures show Guardian Joe Public blog, Julia Unwin (chief executive of the Joseph Rowntree Foundation) (21/5/10)
Data and reports
Households Below Average Income (HBAI) 1994/95-2008/09 Department for Work and Pensions(19/5/10)
Households Below Average Income (pdf file) National Statistics, First Release (20/5/10)
Effects of taxes and benefits on household income Office for National Statistics (see also, especially Tables 26 and 27)
Poverty and inequality in the UK: 2010 Institute for Fiscal Studies
A range of poverty data The Poverty Site
Questions
- What has happened to the distribution of original, gross, disposable and post-tax income distribution (a) by percentage shares of quintile groups of income; (b) in terms of gini coefficients? (See the “Effects of taxes and benefits on household income” reference above.)
- Why is income inequality likely to increase unless strong redistributive policies are pursued by the government?
- What are ‘the drivers behind poverty’?
- To what extent is there a trade-off between economic growth and redistributing incomes from rich to poor?
- Why is it argued that in an increasingly interdependent world, senior executives have to be paid extremely high salaries and be given very large bonuses in order for a company to recruit sufficiently talented people and yet wages have to be kept low to allow goods to remain competitive?
- Why was income much more equally distributed in the 1960s and 70s than it is today?
- What redistributive policies is the new coalition government in the UK pursuing? What factors will determine their success?
Greece’s public deficit currently stands at 13.6% and the UK isn’t that far behind. Austerity measures are planned to reduce the Greek deficit to less than 3% of GDP by 2014. This will be achieved through a variety of spending cuts and tax rises. This is the price that Greece will have to pay to receive a £95 billion bailout. Wages are likely to be frozen, cuts will be evident throughout the economy in areas such as education and pensions and the general population may see a tax rise.
In response to these proposals, on which Parliament will vote by the end of the week, the Greek economy has suffered from widespread strikes. Flights were grounded, trains stopped, schools shut, hospitals closed their doors, offices closed for business and those close to retirement are considering resignation before the measures are passed.
As life almost comes to a stop in Greece, could the UK follow suit? It’s no secret that the UK deficit is enormous – £163 billion or about 12% of GDP. Nor is it a secret that spending cuts and tax rises are inevitable. Furthermore, over the past two years, there have been several high profile strikes. (See article The Winter of Discontent: the sequel? and Turbulence in the air). A spokesman from The Public and Commercial Services Union said:
“If the cuts are anything like what is being suggested, industrial action by the unions is not only likely, it’s inevitable”.
The bailout of Greece may avert one Greek tragedy, but another one could be just around the corner and that’s not just for Greece.
Greece brought to half over general strike over cuts BBC News (5/5/10)
Greek strikes test government austerity plans Reuters (4/5/10)
Bank of England Governor: poll winner will be out of power for a generation Independent, Andrew Grice and Colin Brown (30/4/10)
Flights grounded, shops shut in Greek strike Channel 4 News, Kris Jepson (5/5/10)
Greek strikers hit Athens streets over austerity plan BBC News (4/5/10)
Greek strikes test government austerity plans The Economic Times (4/5/10)
Questions
- What is the purpose behind the strikes? How effective are they likely to be?
- What are the costs of strikes to a) consumers b) businesses c) the wider economy?
- Why is collective bargaining more effective than individual bargaining?
- Why could the Greek picture be a possible forecast of the UK economy after the May election?
- Are strikes a price worth paying if the government is to reduce its debt?
According to the Budget 2010 Report, public sector current receipts in 2010-11 will be £541 billion. With expected public sector expenditure of £704 billion this leaves a deficit of £163 billion. Of these receipts, £146 billion or 27% is expected to come from income taxation. Several notable developments in the income tax system for 2010/11 include: the freezing of personal allowances, an income limit for personal allowances for those under 65, and the introduction of an additional income tax band.
Personal allowances are amounts of income that can be earned without being liable to income tax. This amount is to be frozen in 2010/11 at the level of 2009/10 so that for an individual under 65, this limit will remain at £6,475. Allowances are typically raised each year in accordance with the rate of price inflation. This then helps to reduce, in part, what is called fiscal drag. Fiscal drag occurs when there is an increase in the proportion of income taken in income tax as a result of allowances not being adjusted for inflation or for the rate of growth in earnings. In other words, by not increasing the amount of income exempt from taxation in 2010/11, any individual whose earnings rise will pay a higher proportion of their earnings in income taxation.
Another change in 2010-11 is the introduction of an income limit on personal allowances for those earning over £100,000. For every £1 earned above this limit, 50 pence will be taken from the allowance. Hence, given the allowance of £6,475 an individual earning £112,950 or more (i.e. £12,950 over the limit) will, in effect, no longer receive any personal allowance.
Now consider changes to the tax brackets. In 2009/10, an individual with an income tax liability of up to £37,400 (i.e. earnings of up to £43,875, once the personal allowance has been taken into account) pays income tax at 20%. This is the ‘basic rate’ band. With a liability of over £37,400, the excess (i.e. the amount over £37,400) is subject to tax at 40%. This is known as the ‘high rate band’. From the 1st April 2010, there is to be an ‘additional rate’ of 50%. The 50% rate will apply to taxable income over £150,000, while taxable income up to £37,400 will continue to be taxed at 20% and that between £37,401 and £150,000 will be taxed at 40%.
Now, an illustration of how the changes for 2010/11 will affect two individuals. Firstly, consider somebody on £110,000. Their tax allowance is ‘reduced’ by £5,000 to £1,475 and so they have a tax liability of £108,525. Of this, they will pay £7,480 at the basic rate (20% of £37,400) and £28,450 at the higher rate (40% of £71,125). With a tax bill of £35,930, their average rate of income tax in 2010-11 will be 32.66%. In 2009/10, the total tax bill will have been £33,930 (20% of £37,400 plus 40% of £66,125) and so an average rate of tax 30.85%
Finally, consider an individual on £200,000. Their income tax bill in 2010/11 will be £77,520 (20% of £37,400 plus 40% of £112,600 plus 50% of £50,000) and so they will face an average rate of tax income tax of 38.76%. In 2009/10 the tax bill would have been £69,930 (20% of £37,400 plus 40% of`£156,125), an average rate of income tax of 34.97%
Articles
The £20 billion tax raid about to hit The Times, Lauren Thompson (27/3/10)
How to beat the new 50% top rate of tax The Times , Mark Atherton (27/3/10)
Budget 2010: Darling draws election battle lines BBC News (24/3/10)
High earners will feel like they have taken a pummelling The Scotsman, Jeff Salway (27/3/10)
Further information
For the full Budget Report, see Budget 2010: Complete Report HM Treasury, March 2010
(The above consists of the two elements, Economic and Fiscal Strategy Report and Financial Statement and Budget Report. It’s a fairly large pdf file and may take a few seconds to download.)
For the particular measures and their impact on government expenditure and/or revenue, see Annex A: Budget policy decisions of the Financial Statement and Budget Report.
See also Rates and allowances – Income taxation HM Revenue and Customs
(Note: from here you can also link to other tax rates.)
Questions
- Consider the efficiency and equity arguments for and against the income tax changes in 2010/11.
- What do you understand by the terms the marginal rate of tax and the average rate of tax?
- How will the changes to the income tax system in 2010/11 affect the marginal and average income tax rates? You could perhaps try plotting these in a chart for different gross incomes.
- How can fiscal drag occur even if personal allowances are raised by the rate of inflation?
The Labour government’s investment in education has been widely publicised since its rise to power in 1997 and there has been a significant increase in funding to match its ‘50% participation in higher education’ target. However, at the university level, this looks set to change. More than 100 universities face a drop in their government grants as a consequence of £450 million worth of cuts. 69 universities face cuts in cash terms and another 37 have rises below 2 per cent. Furthermore, increased funding is now going to those departments where research is of the highest quality, which means that whilst some universities will not see a cut in funding, they will see a reallocation of their funds.
Sir Alan Langlands, Chief Executive of Hefce, said: “These are very modest reductions. I think it is quite likely that universities will be able to cope with these without in any way undermining the student experience.” Despite this reassurance, there are concerns that, with these spending cuts and growing student numbers, class sizes will have to increase, the quality of the education may fall and ultimately, it may mean a reduction in the number of places offered. The Conservatives have estimated that 275,000 students will miss out on a place. UCAS applications have grown by 23% – or 106,389 – so far this year, but the number of places has been reduced by 6000. This policy of cutting places is clearly contrary to the government’s target of 50% participation.
With the average degree costing students over £9000, it is hardly surprising that students are unhappy with these spending cuts and the fact that it could lead to a lower quality education. With the possibility of rising fees (in particular, as advocated by Lord Patten, who has called for the abolition of a “preposterous” £3,200 cap on student tuition fees) and a lower quality degree, this means that students could end up paying a very high price for a university education.
Articles
Universities fear research funding cuts Financial Times (18/3/10)
More students but who will pay? BBC News, Sean Coughlan (18/3/10)
University cuts announced as recession bites Reuters (18/3/10)
How about $200,000 dollars for a degree? BBC News, Sean Coughlan (18/3/10)
Liberate our universities Telegraph (17/3/10)
Universities should set own fees, say Oxford Chancellor Patten Independent, Richard Garner (17/3/10)
University budgets to be slashed by up to 14% Guardian, Jessica Shepherd (18/3/10)
Universities face cuts as Hefce deals with first funding drop in years RSC, Chemistry World (17/3/10)
University cuts spell campus turmoil BBC News, Hannah Richardson (18/3/10)
Universities told of funding cuts Press Association (18/3/10)
100 universities suffer as government announces £450 million of cuts Times Online, Greg Hurst (18/3/10)
Data
HEFCE announces funding of £7.3 billion for universities and colleges in England HEFCE News (18/3/10)
Questions
- Why is there justification for government intervention in higher education? Think about the issues of efficiency and equity and why the market for education fails.
- What are the arguments (a) for and (b) against allowing universities to set their own tuition fees?
- Why is the government planning these substantial cuts to university funding, when it is still trying to increase the number of students getting places at university?
- Is the ‘50% participation in higher education’ a good policy?
- What are the benefits of education? Think about those accruing to the individual and those gained by society. Can you use this to explain why the government has role in intervening in the market for higher education?
- Is it right that more spending should go to those departments with higher quality research? What are the arguments for and against this policy?
- What are the costs to a student of a university education and how will they change with funding cuts and possibly higher tuition fees?