Friday, 29 July 2011

Doom and Gloom ahead for the UK economy?

Recently released data seems to paint a rather bleak outlook for the UK economy as it tries to build a recovery.  The Office of National Statistics reported this week that the UK economy had only a meager growth of 0.2% in the second quarter of the year. This figure was lower than predicted but many economists actually thought that growth would be negative and that we would be slipping towards another recession. "One off factors" such as the royal wedding and the Japanese tsunami have been blamed for the negligible growth but to me these excuses are rather flimsy. To me it appears obvious that in times of global economic hardship, not enough is being done by the coalition to encourage growth. Yes, exports would have fallen due to the earthquake that devastated Japan and the country did grind to a halt as April appeared to be a bank holiday but can't Cameron and his side kick Clegg realise that their policies are having no effect.

The second piece of bad news came yesterday when Centrica, the owner of British Gas announced profits of £1.3bn in the first 6 months of the year, just as gas and electricity prices are set to rise substantially. With these goods being relatively inelastic, these price increases will tighten the squeeze on families who are already experiencing falling real wages. This will lead to a fall in consumption as individuals look to save what money they can and cost-push inflation as production costs will rise. 

With inflation well above the Bank of England's target of 2%, the possibility of higher cost-push inflation will put pressure on the Monetary Policy Committee to raise interest rates. If interest rates were raised, the fear is this would kill any growth as it would become more expensive to borrow money at a time when banks seem particularly unwilling to lend. 

This seems to indicate a double edged sword situation, if the BoE fails to raise the Bank Rate, inflation may rise out of control which would cause a breakdown in economic transactions as firms we unable to plan for future prices and costs. This begs the question, what do the BoE value more, economic growth or controlled levels inflation? 

Maybe the government help solve the problem. Instead of dodging the real issues that are affecting firms in the UK, they could use their power for good which would in the long run, help them gain the trust of the public. One idea could be to cut the level of National Insurance which employers pay. Although National Insurance is not classified as a tax by the government, it effectively is and so by reducing its rate, this would incentivise firms to hire employees and increase output. This would lead to a sharp increase in growth and would allow the BoE to set about bringing down the level of inflation without a fear of killing growth. Of course if it were this simple, you would like to think that the government would be setting about implementing the changes but surely it is a better idea than them resting on their laurels and seeing what the future brings. I'm sure that if the coalition listened to employers, they would echo what i have said. If the coalition turns a blind eye to the cries from the public, the future of the British economy doesn't look so bright.

Saturday, 23 July 2011

Just a couple of points...

I'm back from the wilderness with a couple of points for this week. Nothing too technical just a few ideas and views i have.

I started working for a firm which produces labels and tags last week and seeing the economics of the business in real life stimulated me to doubt economic models which i had learnt at A level. I'll give you an example, at this firm to produce a label there are many steps involved in the production process which means that finding the marginal cost of producing a label is hard to calculate. It is not simply the cost of the materials that make up the marginal cost but also the cost of electricity used and more importantly, the cost of the labour used. Determining the productivity and opportunity cost of the labour force involved in the multi-step  production process makes finding the marginal cost of the products hard to work out. Relating this to economic theory, this causes me to doubt the models of a monopoly and perfect competition. If it is difficult to calculate the costs of producing the output, how can you accurately determine the profit-maximising point?

Secondly, i was listening to radio one this week and they had gone out on the streets to find out what the opinions of the general public were of the on going crisis in the eurozone as it emerged this week that Greece was to receive another bail out package. The general consensus was that people didn't care about the situation in europe as Britain isn't part of the eurozone and so we would be unaffected by the chaos. This really scared me as i know that 40% of Britain's trade is with the eurozone and that British banks own assets within Greece and the rest of Europe. That is why i think economic modules need to be included in the National Curriculum so that people are aware of how an economy works and so misconceptions such as the one described above are avoided. Im not saying that economics needs to become mandatory for children but more along the lines that certain macroeconomic modules should be included in subjects such as geography at GCSE. Already, tourism is included in GCSE geography and so theories on trade could easily be integrated there. It's just an idea but i was frightened by the misconceptions that the general public displayed and feel that if people were more aware of real picture, their choices and behaviour would be different.

Any thoughts anyone?

Wednesday, 13 July 2011

The economy of Jersey

My School career ended yesterday as i returned from a four day cricket tour with the school 1st XI from jersey. Jersey is a British Crown Dependency and so it is not part of the United Kingdom but is very similar to the UK as the equivalent to the Prime minister, known as the Baliff, is appointed by the British Monarch (i.e the Queen)

As a budding, young economist i was quite keen to look into the economy of Jersey when i got home and in particular, the taxation system of jersey as i had heard that is a popular home to high earners who are keen to avoid paying UK income tax rates.

There are a few key features of the taxation system in Jersey which makes it significantly different to that of the UK.

Firstly, there is no progressive taxation system in Jersey but rather a flat tax for income tax levied at 20%. Many economists, including probably The Amateur Economist, would not agree with this system as they would see it as a less equitable tax which would inevitably penalise the lower earners. They would argue that this would lead to a more unequal distribution of income ( and therefore a higher Gini coefficient) which could propose social difficulties. However, i see a flat tax as an opportunity for workers to maximise their income as the marginal rate of tax is constant and so workers are incentivised to work harder to increase their income.

Secondly, in Jersey there is not VAT imposed on goods. This means that goods are considerably cheaper over in Jersey than in the UK. This has lead to an increase in tourism as residents of the UK and France will pop over to Jersey and purchase luxury items such as watches and jewellery which would be considerably more expensive in the UK with VAT. The lack of VAT on goods has also lead to an increase in exports of goods from Jersey as the goods are cheaper than domestically produced ones. If countries wanted to stop this inflow of Jersey goods than protectionist techniques such as a tariff could be imposed. In recent years the government of Jersey has brought in a Goods and Services tax which is similar to that of VAT but is levied at a much lower rate and still therefore allows Jersey goods to be cheaper than those in the UK.

Finally, all Jersey businesses exempt those in the financial sector do not have to pay corporation tax (a tax on profits) and so once again firms are incentivised to maximise their profits. The firms in the financial sector pay a flat corporation tax of 10% and this is still a relatively low rate of tax.

So, the tax system of Jersey seems to be a much more free market approach than that of the UK as enterprise seems to be rewarded via lower income and corporation tax. This means however, that the role of the state in Jersey is much less as there is lower tax revenue and so support for the lower earners is reduced. This may lead to a much higher disparity in living standards on the island and i saw this to a certain degree when i visited. It appeared that the Jersey locals were performing the lower paid jobs whilst the immigrants who had moved to the island to benefit from the tax breaks were living the life of luxury.