Child Benefit is a universal benefit, which means it is awarded on the basis of having a certain contingency (a child!) and not on the basis of a contributions record or an income test. It is for this latter reason that the equity and efficiency of child benefit has come into question.
Is it really equitable or a good use of money for a family earning £200,000 per year to receive child benefit of £20.30 per week for the first child and £13.40 each week for every subsequent child? Do these families really need the money, or would it be better spent on education, healthcare etc? This question became even more pertinent with the growing budget deficit facing the UK and the Coalition’s policy of cutting the deficit and hence cutting government expenditure.
Child benefit was one of the benefits targeted by the Coalition. It would be removed from higher rate tax payers. Those earning more than £44,000 would no longer be eligible to receive it. For some this seems like a good policy – the benefit is being targeted at those who need it most – it is becoming more vertically efficient. However, for others this presents a problem, not least because it looks at individual income and not family income. If there is a 2 parent household, with each parent earning, say, £40,000 then total household income is £80,000. Yet, this family is still eligible to receive child benefit, as neither of their incomes exceed £44,000. However, a 2 parent household, where one person works and earns £45,000 and the other only works part time and earns £5,000 would not receive child benefit, despite their total household income being only £50,000. This policy, unsurprisingly, faced criticisms of inequity and that middle income households would be the ones who saw their income squeezed and were made significantly worse off.
Amid these criticisms, David Cameron has admitted that there is an issue with the threshold and those facing the cliff edge of becoming a higher rate tax payer and losing the benefit. The Chancellor is unlikely to be in favour of any significant changes that will reduce the projected £2.5bn savings the policy will make. Although the policy still looks set to go ahead, following the Coalition’s defeat in the House of Lords concerning cuts to welfare and Cameron’s desire to retain the loyalty of Conservative supporters, we may still see some revisions to the initial proposal. The following articles consider this highly charged issue.
Webcasts
Child benefit cut will go ahead, says Osborne BBC News (13/1/12)
George Osborne: child benefit plans will go ahead The Telegraph, Robert Winnett (9/5/11)
Child benefit cut to hit 1.5 million families, says IFS BBC News (13/1/12)
Articles
Osborne sticks to child benefit cut The Press Association (13/1/12)
Middle-class parents could keep their child benefit after all Independent, Andrew Grice (13/1/12)
Welfare payment cap poses ‘real risks to children’s rights’ Guardian, Randeep Ramesh (11/1/12)
Universal child benefit has had its day Mail Online, Janice Atkinson-Small (13/1/12)
Questions
- What is the difference between a benefit such as income support and child benefit?
- Define the terms horizontal and vertical efficiency and horizontal and vertical equity.
- To what extent does child benefit (as a universal benefit) conform with your definitions above? Would the new means tested child benefit meet the objectives of horizontal and vertical efficiency and horizontal and vertical equity any better?
- Why are middle-income families and women likely to be the most affected by the proposed changes to child benefit?
- Why is there a growing pressure on the Coalition government to rethink the proposal?
- If child benefit is removed from higher rate tax payers, should other benefits be changed to compensate some families for their losses?
The history of macroeconomic thought has been one of lively debate between different schools.
First there is debate between those who favour active government intervention (Keynesians) to manage aggregate demand and those who favour a rules-based approach of targeting some variable, such as the money supply (as advocated by monetarists) or the rate of inflation (as pursued by many central banks), or a hybrid rule, such as a Taylor rule that takes into account a weighted target of inflation and real output growth.
Second there is debate about the relative effectiveness of monetary and fiscal policy. Monetarists argue that monetary policy is relatively effective in determining aggregate demand, which in turn affects output in the short run but only prices in the long run. Keynesians argue that monetary policy can be weak in the short run if the economy is in recession. Quantitative easing may simply be accompanied by a decline in the velocity of circulation. It’s not enough to make more money available and keep interest rates close to zero; people must have the confidence to borrow and spend. Keynesians argue that in these circumstances fiscal policy is more effective.
Third there is the debate about the size of the state and the extent of government borrowing. Libertarians, following the views of economists such as Hayek, argue that reducing the size of the state and reducing government borrowing will create a more dynamic economy, where the private sector will expand to take up the slack created by a reduction in the size of the public sector. Their approach to policy involves a mixture of cutting deficits and market-orientated supply-side policy. Economists on the left, by contrast, argue that economic growth is best stimulated in the short term by increases in government spending and that supply-side policy needs to be interventionist, with the government investing in infrastructure, research and development, education and health. Such growth policies, they argue can be targeted on the poor and help to arrest the growing inequality in society.
These debates have been given added impetus by the global financial crisis in 2008 and the subsequent recession, slow recovery and possibility of a slide back into recession. The initial response of governments and central banks was to stimulate aggregate demand. Through combinations of expansionary fiscal policy, interest rates cut to virtually zero and programmes of quantitative easing, the world seemed set on a course for recovery. But one result of the policies was a massive expansion in government deficits and debt. This led to increasing criticisms from the right, and a move away from expansionary to austerity fiscal policies in order to contain debts that were increasingly being seen as unsustainable. And all the while the debates have raged.
The following podcast and articles look at the debates and how they have evolved. The picture painted is a more subtle and nuanced one than a stark ‘Keynes versus Hayek’, or ‘Keynesians versus monetarists’.
Podcast
Keynes v Hayek: The debate continues BBC Today Programme, Nicholas Wapshott and Paul Ormerod (23/12/11)
Articles
Von Hayek Revisited – Warts and All CounterPunch, David Warsh (26/12/11)
Fed up with Bernanke Reuters, Nicholas Wapshott (20/12/11)
Paul Krugman Versus Milton Friedman Seeking Alpha, ‘Shareholders Unite’ (6/12/11)
Keynes Was Right New York Times, Paul Krugman (29/12/11)
Keynes, Krugman, and Austerity National Review Online, William Voegeli (3/1/12)
The Madness of Lord Keynes The American Spectator, Samuel Gregg (19/12/11)
Central Bankers vs. Natural Stock Market Cycles in 2012 The Market Oracle, David Knox Barker (28/12/11)
Now is the time to eat, drink and be merry Financial Times, Samuel Brittan (29/12/11)
Questions
- To what extent is quantitative easing consistent with (a) Keynesian and (b) monetarist approaches to macroeconomic policy?
- What is meant by the ‘liquidity trap’ and what are its implications for monetary policy? Have we witnessed a liquidity trap since the beginning of 2009?
- What are the arguments for and against an independent central bank?
- Explain Milton Friedman’s assertion ‘that it was the Fed’s failure in 1930 to pursue “open market operations” on the scale needed that deepened the slump’.
- What are the implications of growing government deficits and debt for policies to avoid a slide back into recession?
Original post (19/9/11)
The Independent Commission on Banking (ICB), led by Sir John Vickers, has just delivered its report. Central to its remit was to investigate ways of making retail banking safer and avoid another bailout by the government, as was necessary in 2007/8.
The report recommended the ‘ringfencing’ of retail banking from the more risky investment banking, often dubbed ‘casino banking’. In other words, if the investment arm of a universal bank made a loss, or even faced collapse, this would not affect the retail arm. The ringfenced operations would include banking services to households and small businesses. Wholesale and investment banking would be outside the ringfence. As far as retail banking services to big business are concerned, these could be inside the ringfence, but details would need to be worked out about precisely which banking services to big business would be inside and which would be outside the ringfence.
The ICB was keen to stress that the ringfence should be high and that the retail arm should be both operationally and legally separate from the wholesale/investment arm. The ringfenced part of the bank should have a capital adequacy ratio of up to 20% (above the Basel III recommendations), with at least 10% of liabilities in the form of equity. Capital could only be moved from the ringfenced arm to the investment arm of the bank if this did not breach the 10% ratio.
The ICB report also recommends measures to increase competition in banking, including making it easier to switch accounts, greater transparency about the terms of accounts and a referral of the banking industry for a competition investigation in 2015. The cost to the banking industry of the measures, if fully implemented, is estimated to be between £4m and £7m.
Because of the requirement in the report for banks to build up their capital and the danger that a too rapid process here would jeopardise the expansion of lending necessary to underpin the recovery, banks would be given until 2019 to complete the recommendations. Moves towards this, however, would need to start soon.
Update (19/12/11)
In December 2011, the government announced that it would accept most of the ICB report, including separating retail and investment banking. It would not, however, demand such stringent capital requirements as those recommended in the report.
The following articles examine the details of the proposals and their likely effectiveness. The later articles examine the government’s response.
Original articles (some with videos)
Vickers report: main points The Telegraph (12/9/11)
Bank reforms aim to get taxpayers off the hook Money Marketing, Natalie Holt, Steve Tolley (15/9/11)
Vickers report: key point Guardian, Jill Treanor (12/9/11)
Vickers report: banks get until 2019 to ringfence high street operation Guardian, Jill Treanor (12/9/11)
Bank reform: To rip asunder The Economist (17/9/11)
Banking reforms: Good fences The Economist (17/9/11)
Banks barred from putting depositors’ money at risk as Vickers’ reforms increases costs by up to £7 billion The Telegraph, Harry Wilson (12/9/11)
Vickers report: Q&A The Telegraph (12/9/11)
Vickers report: reaction The Telegraph (12/9/11)
ICB bank reforms could cost UK banks £7bn a year The Telegraph, Harry Wilson (12/9/11)
Money Insider: Will reforms really shake up the high street? Independent, Andrew Hagger (17/9/11)
Bank reforms bring quick improvements Financial Times, Elaine Moore (16/9/11)
Vickers’ critics are missing the point Financial Times, Diane Coyle and Jonathan Haskel (12/9/11)
Audio podcasts
The Business podcast: The Vickers report Guardian, Aditya Chakrabortty, Jill Treanor and Nils Pratley (13/9/11)
Vickers: Bank reforms ‘will get taxpayers off the hook’ BBC Radio 4, Today Programme, Sir John Vickers (12/9/11)
‘Enormous dilemma’ for UK’s biggest banks BBC Radio 4, Today Programme, Robert Peston (12/9/11)
ICB report and press conference
Press Conference: Vickers: Banks ‘must be ring-fenced’ BBC News (12/9/11)
Portal to Full Report and Transcript of Opening Remarks by Sir John Vickers at Press Conference. Independent Commission on Banking
Later articles and webcasts
Chancellor George Osborne to announce banking split BBC News, Nigel Cassidy (19/12/11)
Osborne to address MPs on Vickers’ report into banking BBC News (19/12/11)
Bank break-up law by 2015 BBC News. Robert Peston (18/12/11)
Osborne to Pledge U.K. Bank Legislation by 2015 Bloomberg, Gonzalo Vina and Jennifer Ryan (19/12/11)
In bank reform, ‘in full’ must mean exactly that Independent (19/12/11)
How far and how fast is key to the reforms Independent, Ben Chu (19/12/11)
George Osborne poised to bring in full banking reforms The Telegraph, Louise Armitstead and Harry Wilson (18/12/11)
EU will not impede Vickers reforms Financial Times, George Parker and Sharlene Goff (18/12/11)
Questions
- Explain the difference between a capital adequacy ratio and a liquidity ratio. Will the Vickers proposals help to increase the liquidity of the retail banking arm of universal banks?
- Does it matter if equity capital in excess of the 10% requirement for retail banking is transferred to a bank’s investment arm?
- What risks are there for a bank in retail banking?
- What are the advantages and disadvantages of bringing in the measures gradually over an 8-year period?
- Does it matter that the capital adequacy requirements are higher than under the internationally accepted standards in Basel III?
- Assume that there is another global financial crisis. Will the proposals in the report mean that the UK taxpayer will not have to provide a bailout?
When people shop in supermarkets they often look for what’s on special offer. After all, everyone likes a bargain. About 35–37% of supermarket items are on special offer at any one time and around 50% of the money spent by customers is on such items.
But things aren’t always as they seem. Supermarkets use clever marketing to persuade people that they’re getting a good deal, while sometimes it’s nothing of the sort. Examples include putting up prices for a while and then reducing them again saying “huge reduction”; or promoting an offer of, say, “three for £2”, when you could buy an individual item for 60p; or using the word “now” £2.50 to imply that the previous price was higher, when in fact it wasn’t; or selling a double-sized “value pack” for more than double the price of the regular size. These tricks are commonplace in supermarkets.
Sometimes the wary consumer will be able to find out which offers are genuine, but it’s not always that easy. And even if you do buy something at a genuine discount, is it something you really want? Or have you been persuaded to buy it simply because it’s on offer? Supermarkets study consumers’ psychology. They find clever ways of promoting products to make us feel that we have done well in getting a bargain.
The following programme in the BBC’s Panorama series looks at the big four supermarkets in the UK – Tesco, Asda, Sainsbury’s and Morrisons – which between then have 68% of supermarket sales. It gives examples of some of the not so special offers and how consumers are being hoodwinked.
Webcast
Revealed: The truth about supermarket ‘bargains’ BBC Panorama (clip), Sophie Raworth (5/12/11)
The Truth About Supermarket Price Wars BBC Panorama (full programme), Sophie Raworth (5/12/11)
Articles
What you need to know about the supermarket price wars Totally Money (7/12/11)
Supermarkets accused of misleading consumers The Telegraph, Nick Collins (5/12/11)
Supermarket price war: Can they all be cheapest? BBC News, Anthony Reuben (9/12/11)
Are Our Retailers Criminals? International Supermarket News, Laura Elliott (6/12/11)
Supermarket deals “not what they seem” warns expert Retail Gazette, Gemma Taylor (6/12/11)
Questions
- What types of misleading offers are identified in the Panorama report?
- For what reasons are consumers “taken in” by such offers? Does this imply that consumers are irrational?
- Does intense oligopolistic competition between the big four supermarkets lead to lower prices?
- How is it possible for two supermarkets to claim that they are cheaper than the other? How would you decide which supermarket was generally cheaper?
- Why might it be difficult for an independent agency to do a comparison of prices of different supermarket chains?
Divided we stand is the title of a new report by the Organisation for Economic Co-operation and Development (OECD). Its sub-title is “Why inequality keeps rising”. The report shows how the gulf between rich and poor has widened in most countries, both developed and developing. As the introduction states:
In the three decades prior to the recent economic downturn, wage gaps widened and household income inequality increased in a large majority of OECD countries. This occurred even when countries were going through a period of sustained economic and employment growth.
The report analyses the major underlying forces behind these developments. Its conclusion is that inequality looks set to continue widening, especially with the worldwide economic slowdown and rise in unemployment. However, the report says that “there is nothing inevitable about growing inequalities. Globalisation and technological changes offer opportunities but also raise challenges that can be tackled with effective and well-targeted policies.”
So just what is the extent of inequality? How has it changed over time? And what can be done to reduce inequality? The webcast produced by the OECD to accompany the report looks at the problem, and the report and articles look at what can be done about it.
Webcast
Record inequality between rich and poor OECD (5/12/11)
Articles
Governments need will to fix growing inequality Times Colonist (Canada), Paul Willcocks (8/12/11)
Capitalism defies the laws of gravity Sydney Morning Herald, (7/12/11)
UK pay gap rises faster than any rich nation – OECD The Telegraph, (5/12/11)
The Income Inequality Boom: It’s Real and It’s Everywhere The Atlantic, Derek Thompson (6/12/11)
Income inequality growing faster in UK than any other rich country, says OECD Guardian, Randeep Ramesh (5/12/11)
OECD inequality report: how do different countries compare? Guardian datablog (5/12/11)
Inequality in Britain: faring badly in an unfair world Guardian (5/12/11)
OECD calls time on trickle-down theory Financial Times, Nicholas Timmins (5/12/11)
Wage inequality ‘getting worse’ in leading economies BBC News, Adam Fleming (5/12/11)
OECD Report and Documents
Governments must tackle record gap between rich and poor, says OECD OECD Press Release (5/12/11)
Divided we Stand: Why Inequality Keeps Rising – Introduction by Angel Gurría, OECD Secretary-General, at Press Conference OECD (5/12/11)
Divided we Stand: Why Inequality Keeps Rising – 4-Page Summary of Report (5/12/11)
An Overview of Growing Income Inequalities in OECD Countries: Main Findings OECD (5/12/11)
Questions
- Why may inequality be seen as a ‘bad thing’ for society as a whole and not just the poor?
- Does it matter for the poor if rich people’s incomes grow at a greater rate than those of the poor so long as the incomes of the poor do indeed grow?
- Explain what is meant by the Gini coefficient. What has happened to the Gini coefficient over the past few years across the world?
- Are there any common explanatory features in the economies of those countries where income inequality is growing rapidly? Similarly, are there any common explanatory features in the economies of those countries where income inequality is not growing, or growing only very slowly?
- What are the causes of rising inequality?
- Identify policies that can be adopted to tackle growing inequality.
- What problems arise from policies to reduce inequality by (a) reducing inequalities in disposable income; (b) providing more free services to all, such as healthcare and education? How might these problems be mitigated?
Child Benefit is a universal benefit, which means it is awarded on the basis of having a certain contingency (a child!) and not on the basis of a contributions record or an income test. It is for this latter reason that the equity and efficiency of child benefit has come into question.