Search Results for: getting real with pay

26 September 201427 September 2014

Plus ça change, plus c’est la même chose

The French economy is flatlining. It has just recorded the second quarter of zero economic growth, with growth averaging just 0.02% over the past 12 months. What is more, the budget deficit is rising, not falling. In April this year, the French finance minister said that the deficit would fall from 4.3% in 2013 to 3.8% in 2014 and to the eurozone ceiling of 3% in 2015. He is now predicting that it will rise this year to 4.4% and not reach the 3% target until 2017.

The deficit is rising because a flatlining economy is not generating sufficient tax revenues. What is more, expenditure on unemployment benefits and other social protection is rising as unemployment has risen, now standing at a record 10.3%.

And it is not just the current economic situation that is poor; the outlook is poor too. The confidence of French companies is low and falling, and investment plans are muted. President Hollande has pledged to cut payroll taxes to help firms, but so far this has not encouraged firms to invest more.

So what can the French government do? And what can the EU as a whole do to help revive not just the French economy but most of the rest of the eurozone, which is also suffering from zero, or near zero, growth?

There are two quite different sets of remedies being proposed.

The first comes from the German government and increasingly from the French government too. This is to stick to the austerity plans: to get the deficit down; to reduce the size of government in order to prevent crowding out; and to institute market-orientated supply-side policies that are business friendly, such as reducing business regulation. Business leaders in France, who generally back this approach, have called for reducing the number of public holidays and scrapping the maximum 35-hour working week. They are also seeking reduced business taxes, financed by reducing various benefits.

Increasingly President Hollande is moving towards a more business-friendly set of policies. Under his government’s ‘Responsibility Pact’, a €40 billion package of tax breaks for business will be financed through €50 billion of cuts in public spending. To carry through these policies he has appointed an ex-investment banker, Emmanuel Macron, as economy minister. He replaces Arnaud Montebourg, who roundly criticised government austerity policy and called for policies to boost aggregate demand.

This brings us to the alternative set of remedies. These focus on stimulating aggregate demand through greater infrastructure investment and cutting taxes more generally (not just for business). The central argument is that growth must come first and that this will then generate the tax revenues and reductions in unemployment that will then allow the deficit to be brought down. Only when economic growth is firmly established should measures be taken to cut government expenditure in an attempt to reduce the structural deficit.

There are also compromise policies being proposed from the centre. These include measures to stimulate aggregate demand, mainly through tax cuts, accompanied by supply-side policies, whether market orientated or interventionist.

As Europe continues to struggle to achieve recovery, so the debate is getting harsher. Monetary policy alone may not be sufficient to bring recovery. Although the ECB has taken a number of measures to stimulate demand, so far they have been to little avail. As long as business confidence remains low, making increased liquidity available to banks at interest rates close to zero will not make banks more willing to lend to business, or businesses more willing to borrow. Calls for an end, or at least a temporary halt, to austerity are thus getting louder. At the same time, calls for sticking to austerity and tackling excessive government spending are also getting louder.

Articles

Hollande entrusts French economy to ex-banker Macron Reuters, Ingrid Melander and Jean-Baptiste Vey (26/8/14)
France’s new Minister of the Economy Emmanuel Macron described by left-wingers as a ‘copy-and-paste Tony Blair’ Independent, John Lichfield (28/8/14)
Merkel praises France’s economic reform plans after Berlin talks with PM Valls Deutsche Welle (22/9/14)
French economy flat-lines as business activity falters Reuters, Leigh Thomas (23/9/14)
French public finances: Rétropédalage The Economist (13/9/14)
French employer group urges ‘shock therapy’ for economy Reuters (24/9/14)
Last chance to save France: loosen 35-hour week and cut public holidays, say bosses The Telegraph (24/9/14)
‘Sick’ France’s economy is stricken by unemployment ‘fever’ The Telegraph (17/9/14)
France’s economics ills worsen but all remedies appear unpalatable The Observer, Larry Elliott and Anne Penketh (31/8/14)
The Fall of France The New York Times, Paul Krugman (28/8/14)
Why Europe is terrified of deflation Salon, Paul Ames (20/9/14)
Europe’s Greater Depression is worse than the 1930s The Washington Post, Matt O’Brien (14/8/14)
Worse than the 1930s: Europe’s recession is really a depression The Washington Post, Matt O’Brien (20/8/14)
Eurozone business growth slows in September, PMI survey finds BBC News (23/9/14)
Europe must ‘boost demand’ to revive economy, US warns BBC News (21/9/14)
Valls says France would never ask Germany to solve its problems Reuters, Annika Breidthardt and Michelle Martin (23/9/14)
The euro-zone economy: Asset-backed indolence The Economist (11/9/14)

Data

Annual macro-economic database (AMECO) Economic and Financial Affairs DG, European Commission
Business and Consumer Surveys Times Series Economic and Financial Affairs DG, European Commission
StatExtracts OECD
Statistics database European Central Bank

Questions

What types of supply-side reforms would be consistent with the German government’s vision of solving Europe’s low growth problem?
How could a Keynesian policy of reflation be consistent with getting France’s deficit down to the 3% of GDP limit as specified in the Stability and Growth Pact (see)?
What is meant by (a) financial crowding out and (b) resource crowding out? Would reflationary fiscal policy in France lead to either form of crowding out? How would it be affected by the monetary stance of the ECB?
Give examples of market-orientated and interventionist supply-side policies.
What is meant by the terms ‘cyclical budget deficit’ and ‘structural budget deficit’. Could demand-side policy affect the structural deficit?
Using the European Commission’s Business and Consumer Surveys find our what has happened to business and consumer confidence in France over the past few months.
How important is business and consumer confidence in determining economic growth in (a) the short term and (b) the long term?

26 June 201427 June 2014

Rich and poor in the UK

The ONS has just released its annual publication, The Effects of Taxes and Benefits on Household Income. The report gives data for the financial year 2012/13 and historical data from 1977 to 2012/13.

The publication looks at the distribution of income both before and after taxes and benefits. It divides the population into five and ten equal-sized groups by household income (quintiles and deciles) and shows the distribution of income between these groups. It also looks at distribution within specific categories of the population, such as non-retired and retired households and different types of household composition.

The data show that the richest fifth of households had an average pre-tax-and-benefit income of £81,284 in 2012/13, 14.7 times greater than average of £5536 for the poorest fifth. The richest tenth had an average pre-tax-and-benefit income of £104,940, 27.1 times greater than the average of £3875 for the poorest tenth.

After the receipt of cash benefits, these gaps narrow to 6.6 and 11.0 times respectively. When the effect of direct taxes are included (giving ‘disposable income’), the gaps narrow further to 5.6 and 9.3 times respectively. However, when indirect taxes are also included, the gaps widen again to 6.9 and 13.6 times.

This shows that although direct taxes are progressive between bottom and top quintiles and deciles, indirect taxes are so regressive that the overall effect of taxes is regressive. In fact, the richest fifth paid 35.1% of their income in tax, whereas the poorest fifth paid 37.4%.

Taking the period from 1977 to 2012/13, inequality of disposable income (i.e. income after direct taxes and cash benefits) increased from 1977 to 1988, especially during the second two Thatcher governments (1983 to 1990) (see chart opposite). But then in the first part of the 1990s inequality fell, only to rise again in the late 1990s and early 2000s. However, with the Labour government giving greater cash benefits for the poor, inequality reduced once more, only to widen again in the boom running up to the banking crisis of 2007/8. But then, with recession taking hold, the incomes of many top earners fell and automatic stabilisers helped protect the incomes of the poor. Inequality consequently fell. But with the capping of benefit increases and a rise in incomes of many top earners as the economy recovers, so inequality is beginning to rise once more – in 2012/13, the Gini coefficient rose to 0.332 from 0.323 the previous year.

As far as income after cash benefits and both direct and indirect taxes is concerned, the average income of the richest quintile relative to that of the poorest quintile rose from 7.2 in 2002/3 to 7.6 in 2007/8 and then fell to 6.9 in 2012/13.

Other headlines in the report include:

Since the start of the economic downturn in 2007/08, the average disposable income has decreased for the richest fifth of households but increased for the poorest fifth.

Cash benefits made up over half (56.4%) of the gross income of the poorest fifth of households, compared with 3.2% of the richest fifth, in 2012/13.

The average disposable income in 2012/13 was unchanged from 2011/12, but it remains lower than at the start of the economic downturn, with equivalised disposable income falling by £1200 since 2007/08 in real terms. The fall in income has been largest for the richest fifth of households (5.2%). In contrast, after accounting for inflation and household composition, the average income for the poorest fifth has grown over this period (3.5%).

This is clearly a mixed picture in terms of whether the UK is becoming more or less equal. Politicians will, no doubt, ‘cherry pick’ the data that suit their political position. In general, the government will present a good news story and the opposition a bad news one. As economists, it is hoped that you can take a dispassionate look at the data and attempt to relate the figures to policies and events.

Questions

Define the following terms: original income, gross income, disposable income, post-tax income, final income.
How does the receipt of benefits in kind vary across the quintile groups? Explain.
What are meant by the Lorenz curve and the Gini coefficient and how is the Gini coefficient measured? Is it a good way of measuring inequality?
Paint a picture of how income distribution has changed over the past 35 years.
Can changes in tax be a means of helping the poorest in society?
What types of income tax cuts are progressive and what are regressive?
Why are taxes in the UK regressive?
Why has the fall in income been largest for the richest fifth of households since 2007/8? Does this mean that, as the economy recovers, the richest fifth of households are likely to experience the fastest increase in disposable incomes?

28 November 201328 November 2013

The end of the American dream?

Growing inequality of income and wealth is a common pattern throughout the world. In the boom years up to 2008, the rich got a lot richer, but at least those on low incomes generally saw modest rises in their incomes. Since 2008, however, the continually widening gap between rich and poor has seen the poor and many on middle incomes getting absolutely poorer.

The problem is particularly acute in the USA. Indeed, in his 2012 State of the Union address, President Obama said that it was the ‘defining issue of our time.’

No challenge is more urgent. No debate is more important. We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by. Or we can restore an economy where everyone gets a fair shot, everyone does their fair share, and everyone plays by the same set of rules.

The good news for the poor in the USA is that at last their incomes have stopped falling, thanks to stronger economic growth. But their share of the growth in GDP is tiny. As The Economist article states:

The main message is a grim one. Most of the growth is going to an extraordinarily small share of the population: 95% of the gains from the recovery have gone to the richest 1% of people, whose share of overall income is once again close to its highest level in a century. The most unequal country in the rich world is thus becoming even more so.

Apart from the ethical question of whether it is desirable for a society, already highly unequal, to become even more so, there is the question of whether this growth in inequality threatens economic recovery. Joseph Stiglitz argues that the rich have a low marginal propensity to consume and that this is threatening recovery.

Then there is the question of investment. Because most Americans have not seen any significant rise in incomes, it is easy for them to believe that the country cannot afford to invest more. And certainly it is difficult to persuade people that higher taxes are warranted to fund education, infrastructure or research.

The following articles consider the problem and its implications and look at various policy alternatives.

Articles and videos
Inequality: Growing apart The Economist (21/9/13)
What is income inequality, anyway? CNN, John D. Sutter (29/10/13)
Inequality is literally killing America Press TV (22/11/13)
It’s Economic Inequality Stupid – What to Do About the Biggest Crisis Facing America Huffington Post, Robert Creamer (14/11/13)
US Inequality Now Literally Off the Chart Truthout, Salvatore Babones (8/6/13)
Inequality moves to the front line of US politics Financial Times, Richard McGregor (20/11/13)
Is wealth inequality slowing growth? BBC News, Linda Yueh (21/11/13)
American Inequality in Six Charts The New Yorker, John Cassidy (18/11/13)
Income Inequality ‘Profoundly Corrosive’ Wall Street Journal, Larry Summers (19/11/13)
21 Charts On US Inequality That Everyone Should See Business Insider, Gus Lubin (12/11/13)

Data, information and reports
Income inequality in the United States Wikipedia
Inequality Data & Statistics Inequality.org
Income Main United States Census Bureau
World of Work Report 2013: Snapshot of the United States ILO
World of Work Report 2013 ILO
StatExtracts OECD (Search for Gini)

Questions

How may income inequality be measured?
Comment on the Gini coefficients in the above link to the StatExtracts site.
Why has inequality grown in the USA?
The Swiss have just voted in a referendum to reject a proposal to limit executive pay to 12 times that of the lowest paid worker in the same company. What are the arguments for and against the proposal?
What features of an unequal society tend to perpetuate or even deepen that inequality over time?
What features of a well functioning market economy would help to reduce income inequality?
Are higher marginal tax rates and higher welfare payments the best way of reducing inequality? What other policy options are there?
Compare the views of Paul Krugman and Joseph Stiglitz on the effects of growing inequality on economic growth. How significant is the difference in the marginal propensity to consume of the rich and the poor in explaining the relatively low rate of US economic growth?

1 October 201315 October 2013

Over the cliff

For the second time in nine months, the USA has approached a fiscal cliff. This is where the federal government is forced to make government expenditure cuts and/or impose tax rises. There are two types of cliff face. The first is a legal limit on the size of the federal government debt and hence deficit. The second is failure to agree on a budget.

On January 1st this year, a fiscal cliff was narrowly averted by a last-minute agreement to raise the size of the permitted debt. On the 1st October (the beginning of the financial year), however, the US economy ‘fell over the cliff’. This time is was a failure by Congress to reach agreement over the federal budget. The sticking point was an unwillingness of the Republican majority in the House of Representatives to agree to a budget without the government making concessions on its healthcare reform. The government was unwilling to do that and so no budget was passed.

With no budget, much of government has to shut down! In practice, this means that all non-essential workers will cease to be paid. That includes workers in housing, parts of healthcare, the civil law part of the justice system, immigration, regulatory agencies, the passport service, parks and museums. Even workers in essential areas, such as civilian workers in the military, police and social services, are likely to see their pay delayed until the problem is resolved. The articles below look at some of the implications of this partial shut-down.

It is hoped that, within a few days, agreement on a budget will be reached. But that will not be the end of the story because a second fiscal cliff looms. And that is of the first type. There is currently a legal limit to Federal Government debt of $16.699 trillion. Because that limit was reached earlier this year, from May 18 the government has been able to use various ‘extraordinary measures‘ to carry on borrowing. These measures will run out, however, around 17 October. From then, if a new higher debt ceiling has not been agreed by Congress, the government will be unable to pay some of its bills. For example, on 1 November it will get a bill of $67billion for social security, medicare and veterans benefits. As the second Independent article below explains:

In a government shutdown, the federal government is not allowed to make any new spending commitments. By contrast, if we hit the debt-ceiling then the Treasury Department won’t be able to borrow money to pay for spending that Congress has already approved. In that case, either Congress will have to lift the debt ceiling or the federal government will have to default on some of its bills, possibly including payments to bondholders or Social Security payouts. That could trigger big disruptions in the financial markets — or a long-term rise in borrowing costs.

Not surprisingly, financial markets are nervous. Although the direct effect of lost output will be relatively small, provided agreements on the budget and the debt are reached fairly soon, the impact on confidence in the US system of government could be more damaging. Not only could this curb recovery in the USA, it could have a significant effect on global recovery, given the size and importance of the US economy to the rest of the world.

Webcasts

What does the shutdown mean for normal Americans? BBC News, Keith Doyle (1/10/13)
How the government shut down is being reported in the US BBC News (1/10/13)
Shutdown could slam frail U.S. economy Reuters, Bobbi Rebell (1/10/13)
Shutdown Will Cost U.S. Economy $300 Million a Day, IHS Says Bloomberg, Jeanna Smialek & Ian Katz (1/10/13)
How will the US government shutdown affect the global economy? The Guardian, Larry Elliott and Guy Grandjean (1/10/13)
How would a government shutdown affect the rebounding economy? Aljazeera, Duarte Geraldino (30/9/13)
How will the US government shutdown affect the economy? BBC News, Richard Lister (1/10/13)
Shutdown continues as Obama and Republicans fail to agree BBC News, Rajini Vaidynathan (2/10/13)
Former US Secretary of Labor Robert Reich on shutdown BBC News, Robert Reich (2/10/13)
Government shutdown: What’s the cost? CBS News, Rebecca Kaplan (1/10/13)
US shutdown will have ‘minimal impact’ on global economy One News (New Zealand), Dan Zirker (2/10/13)
What is the US debt ceiling? BBC News, Hugh Pym (14/10/13)

Articles

US wakes up to government shutdown as Congress fails to strike budget deal Independent, Nikhil Kumar (1/10/13)
US begins government shutdown as budget deadline passes BBC News (1/10/13)
David Cameron warns on world growth as US government shuts down The Telegraph, Damien McElroy (1/10/13)
Shutdown showdown: A glossary Aljazeera, Ben Piven (30/9/13)
Everything you need to know about how the partial shutdown will work in US Independent, Brad Plumer (1/10/13)
What’s the economic impact of a US government shutdown? BBC News, Kim Gittleson (1/10/13) (follow links at top of screen for further articles)
US government shutdown isn’t the worst of it BBC News, Linda Yueh (30/9/13)
Onset of the storm BBC News, Robert Peston (1/10/13)
The gathering storm? BBC News, Robert Peston (30/9/13)
Government shutdown: what’s really going on – and who’s to blame? The Guardian, Dan Roberts (30/9/13)
Government shutdown threat is getting very old, very fast CNN, Julian Zelizer (30/9/13)
US fiscal cliff fears rattle the markets The Australian, Adam Creighton (1/10/13)
U.S. Government Shutdown Sinks Dollar Forbes, Dean Popplewell (1/10/13)
US Government Shutdown: European Markets Not Fretting Over Temporary Closure International Business Times, Ishaq Siddiqi (1/10/13)
The States to plunge into abyss of debt, off fiscal cliff Pravda, Irina Sabinina (1/10/13)
Shutting down the United States government nothing new The Vancouver Sun, Andrew Coyne (1/10/13)
Christine Lagarde urges US that debt crisis threatens world economy The Guardian, Larry Elliott (3/10/13)
U.S. failure to lift debt ceiling could damage world – IMF Reuters (3/10/13)

Data

US government shutdown: in numbers The Guardian (see also)
US Budget: Historical Tables White House Office of Management and Budget (includes estimates to 2018 as well as historical data)

Questions

If a debt ceiling is reached, what does this imply for the budget deficit?
How serious are the two current fiscal cliffs?
How would a continuation of the partial government shut-down impact on the US private sector?
What multiplier effects on the rest of the world are likely to arise from a cut in US government expenditure or a rise in taxes? What determines the size of these multiplier effects?
Explain the likely effect of the current crisis on the exchange rate of the dollar into other currencies.
Why might the looming problem of reaching the debt ceiling drive up long-term interest rates in the USA and beyond?

1 May 20131 May 2013

The battle to cut VAT for pubs, restaurants and hotels

Why are 43 companies in the pub and restaurant sector in the UK donating over a £1 million to an 86 year old Frenchman who claims to work a 70 hour week? Jacques Borel has led an interesting and varied life which has included activities such as helping the French resistance in the 2nd world war and opening the first take-away hamburger restaurant in France in 1961. In 2001 he started a campaign to get the European Union to allow member states to reduce the rate of VAT applied to food and drink sold in the pub, hotel and restaurant industry. Organisations such as JD Wetherspoon, Heineken and Pizza Hut are backing his attempts to persuade the UK government of the benefits of this policy.

VAT is paid when goods and services are purchased and is normally included in the price advertised by the seller. It generates a significant amount of money for the UK government and it is estimated that it will raise £102 billion in 2012-13 – the third biggest source of revenue after income tax and national insurance contributions. It is applied at three different rates in the UK – a standard rate of 20%, a reduced rate of 5% and a zero rate i.e. 0%. This may sound straightforward but in reality the tax is extremely complicated as previously discussed in articles on this website . For example most basic or staple items of food sold in shops are zero rated. However there are some rather bizarre exceptions. For example a packet of potato crisps is subject to the standard rate of VAT whereas tortilla chips are not. The standard rate is applied to a packet of Wotsits whereas a zero rate is applied to a packet of Skips!

The campaign headed by Mr Borel focuses on the discrepancy between the zero-rate applied to most food items purchased from a shop and the standard rate applied to food purchased in restaurants or cafes. For example, if you buy a Pizza from a supermarket then you don’t pay any tax on this purchase, whereas if you eat a pizza in a restaurant the standard 20% rate of VAT is applied. Mr Borel is lobbying the UK government to reduce the rate of VAT paid in pubs and restaurants from the standard rate of 20% to the reduced rate of 5%. One reason why so many UK companies are willing to offer him financial support is because of his success in getting governments in other countries such as Germany, Belgium, Finland and France to adopt this policy.

In a recent radio interview Mr Borel was asked to make his case for the proposed reduction of VAT in the UK. He claimed:

I have a commitment from 125 chains of hotels, restaurants and independents to use 60% of the reduction in VAT to lower prices so that would be a 7.5% decrease in price. When you decrease price by that magnitude you will see an increase in customers of 10-12% and you will be forced to hire new staff. In our best case scenario, we plan to create 670,000 jobs in three years.

When asked in another interview why the hospitality sector should be favoured more than others he replied that:

It would create more jobs in a minimal amount of time…you cannot do that with any other industry.

One obvious drawback of the policy would be the loss of revenue for the UK government. Some estimates have suggested that the loss of VAT receipts would be between £5.5 and £7.8 billion. However it has been claimed that over time the impact of the change on government finances would be zero. In response to the proposed tax cut a Treasury spokesman commented:

Any reduced rates would make a significant impact on revenue and, as a significant proportion of spending in these areas is by UK residents, any increase in activity in these areas would largely be at the expense of other consumer spending.

Webcast

Jacques Borel: VAT cut for pubs Morning Advertiser on YouTube (18/5/11)

Articles

Industry VAT campaigner Jacques Borel appears on Radio Four’s Today and Radio Five Propelinfo (24/4/13)
French veteran in fight to cut pub VAT Financial Times, Christopher Thompson (5/6/12)
The fiscal impact of reduced VAT rates VAT Club Jobs (22/4/13)
Pub and restaurant groups pay 86-year-old Frenchman £1m to convince UK government to cut VAT The Mail on Sunday, Sarah Bridge (20/4/13)
French veteran seeks British jobs boost with VAT Reuters (17/1/13)

Questions

In his radio interview Jacques Borel claims that if firms pass on 60% of the cut in VAT this would cause a 7.5% reduction in prices. Explain why this is the case. Clearly outline any assumptions you have made in the analysis
If 60% of the reduction was passed on by firms through lower prices, what do you think would happen to the money generated from the other 40% of the reduction?
Using a demand and supply diagram illustrate the proposed reduction in the rate of VAT on the hospitality industry. Make sure your diagram is drawn in such a way that it clearly illustrates producers passing on 60% of the tax reduction in the form of lower prices.
Assuming that the hospitality industry was very competitive, what impact would a reduction in VAT have on consumer surplus, producer surplus and deadweight welfare loss?
Explain any assumptions you have in your answer to question 3 about the price elasticity of demand and supply.
Using the figures provided in the radio interview is it possible to calculate the price elasticity of demand. Try making the calculation and clearly explain any assumptions you have made.
Explain why the reduction in VAT might have no net effect on government finances in the long run?
What factors determine the price elasticity of supply? What assumption is Mr Borel making about the price elasticity of supply in the hospitality industry compared to other industries when he makes the claim that jobs would be created quickly?
Outline some of the arguments against cutting the rate of VAT.