How times have changed

Since the coalition came to power in 2009 the phrase “we inherited a mess” has being the prelude to almost every statement they have made with regards to the economy. It relates to Labour’s high levels of public expenditure. I try and think of when the Conservatives were in opposition and how much they said at the time to try and curb Labour’s spending. They did not. Moreover, they must accept some blame for allowing such heavy fiscal consumption and doing next to nothing to stop it. Chancellor of the Exchequer George Osborne is to deliver his budget tomorrow, I predict more of the same in terms of deficit reduction, with minor tweaks to try and boost the economy that has been sluggish for well over five years now.

Is Economic Growth the aim for the UK?

High Streets up and down the UK have not had the easiest times lately

Since 2007, the global financial crisis engulfed several leading economies and placed them in a precarious position. Output in many G20 nations declined and it was the worst downturn since the Great depression. When an economy is growing we notice that more people find work, credit is easier to obtain and living standards for the majority of society tends to rise in harmony with the economy. In a downturn and recession (defined to two consecutive quarters of negative output) the opposite tends to occur, less jobs created, rise in unemployment and usually a rise in income tax to compensate for the lost output.

Since the coalition in the UK came into power in May 2009, Chancellor of the Exchequer George Osborne has led the way with polices aimed at reducing the UK’s deficit. A deficit is the sum of government debt, deficits being a flow variable and debt being a stock variable. As we have all heard, this is his primary aim, so we have seen large reductions in government expenditure, in an attempt to curb government spending because the current government deem it too high. Fair enough, Labour may have binged a little on spending and some savings needed to be made. But, the best way to reduce government debt and therefore the deficit, is to stimulate economic growth. It is economic growth that will reduce the deficit, not only will growth translate into more jobs being created, more goods & services made available and more disposable income for households, but it will also help the government achieve their aim of deficit reduction.

It is this failure of George Osborne and Business Secretary Vince Cable to recognise this that has made me ask the question, is economic growth even their aim?

The OECD has backed Osborne’s economic policies, suggesting that fiscal consolidation is an urgent requirement. Whilst I can accept that, there are policies that the government could bring in in order to increase public spending. They have not. When the government came into power one of their first economic decisions was to increase VAT from 17.5% to 20%. This increase of 2.5% makes everyday goods that have VAT attached 2.5% more expensive. If you want people spending, make things cheaper, it’s that simple. Retailers had a rather subdued Christmas, had VAT being 15% or even 12.5% then I’m sure it would have had a significant difference.

The UK is also not a member of the Eurozone. This should provide a bit of protection from the farcical situation currently engulfing several imbalanced economies. Whilst the UK is very close to the other nations, the fact that it can manipulate its currency should provide some breathing room in which it could devalue the Pound and attract new business. With the Chancellor cutting cooperation tax, the UK should be seen as an ideal location for business. However, whatever effect the domestic currency is having alongside the competitive cooperation tax rates is clearly not penetrating the economy strong enough and the recovery is taking much longer than it should be. Moreover, incomes generated by large firms do not appear to be trickling down to the rest of society. Unemployment in the private sector confirms this, as it is increasing at a sluggish rate.

All of these factors combined makes me wonder if all this austerity is actually worth it, because the opportunity cost of allowing the economy to stroll along in this mundane manner represents time lost. It just appears that the government is holding back for future consumption. It is a dangerous move in my opinion because it could lead to large structural damages that could take several years to repair.

The Chancellor will be providing a new Budget soon and I’m sure it will contain more of what we have already heard.

I’ll conclude with the fact that David Cameron does not think you tackle a debt crisis by issuing more debt (governments increase debt when they spend). However, as so long as jobs are created, taxes are paid and the economy is growing the level of debt does not matter because the positive effects of economic growth cancel the negativity associated with the debt. It is when an economy is not growing that the level of debt and deficit becomes an issue. Furthermore, there is not a single large economy that has cut its way to growth, so if it does happen in the UK all of this austerity will be worth it. The benefits do appear to be a long way away right now.

Government Debt and the effects on UK Unemployment.

There has been no secret of the coalition’s economic policies. That has been to reduce the deficit, i.e. the amount of money the government looses each year. The government has also aimed to reduce the burden of high levels of government debt. How it implements these policies has a drastic effect on the UK economy and in particular, unemployment.

Clintons are one of many well known brands to feel the strain of these tough economic times

Government debt management affects all aspects of the economy. The substantial reductions in government spending have led to several members of the population forced to find alternative employment. George Osborne was confident that the private sector would compensate for the jobs lost through the government policies. It is therefore vital to analyse how government debt management has affected the rate of unemployment. UK unemployment is currently 2.53 million, which is 7.9% of the population, which has fallen from the previous is sixteen year high. Last year unemployment peaked at 8.4%. This was an increase by 118,000 from September to November 2011 and a further 28,000 from November to January 2012. Clearly the government’s policies have not had the desired effect.

OECD Economic Outlook 2011

Above is a graphical depiction of the rise in unemployment from 2008, with both jobs losses in the public and private sector also depicted. Despite the claim in the November 2010 Budget, Osborne claimed that the private sector would compensate for the jobs lost in the public sector, the evidence is clearly contrasting to the government’s claim.  The Chancellor claimed,

“Public-sector job creation would far outweigh the job losses in the public-sector.”

Unemployment in the UK continues to rise to record levels and the jobs being lost in the public sector are a direct result of government policy. When The Chancellor made the premature assumption that the private sector would compensate for the jobs lost through the public sector it may have highlighted an inadequacy in government policy. High and rising levels of unemployment is detrimental for economic growth because it places a financial strain on those working as transfer payments such as Job Seekers Allowance (JSA) and benefits. The number of individuals claiming JSA has risen by 28,000 from November 2011 to January 2012. With further increases expected for the rest of 2012 and 2013.  Moreover, there has been an increase in part-time employment as jobseekers have been desperate to earn some income, but it is proving insufficient to make a substantial difference in terms of contributing towards substantial economic growth.

In addition, the higher than target inflation, those in work will have less disposable income and the government will have to increase transfer payments out to those affected by unemployment. Secondly, tax revenue will also decrease simply because less people are in work, the government must therefore create employment in order to raise taxes so it can finance expenditure that can later contribute to economic growth.

Unemployment is therefore the greatest challenge facing the UK economy because it does not appear to declining. By making such large expenditure cuts, the government may have undermined any recovery effort and may find it very difficult to reduces its debt obligations. The most effective method to reducing government debt is establishing sustained economic growth, however, sustained economic growth in the UK is some considerable way away. Although the UK economy is no longer in recession, rising unemployment will continue to place a severe burden on those in work due to the inflationary and tax restraints already in place, with lower disposable income, growth is likely to remain very low. Moreover, the method in which the government has chosen to reduce its debt may have exacerbated the problem because of the sharp rise in structural unemployment.

Starbucks: The Bitter Taste Of Success.

Starbucks in hot water over conduct

Starbucks is facing growing criticism in the UK for paying no corporation tax in the last three years and only paying £8.6m in the last fourteen years of trading. Despite revenue exceeding £3bn in that time, they have managed to pay under £10m and have not paid a penny in the last three years. This does beg the question of how a large corporation, with 735 stores nationwide can manage to pay such little tax. Starbucks has announced consecutive losses from 2008 to now, yet they have managed to expand their operations. It is difficult to comprehend how a business can expand its operations, whilst making substantial losses. Starbucks has adopted a rapacious approach to the coffee market in the UK. It is the global coffee chain and it is the leading chain in the UK.

The head of Starbucks operations in the UK and Ireland is a man named Kris Engskov. Engskov was a former aide to Bill Clinton and during Clinton’s election campaign. A strategy they adopted was to highlight the shortcomings of George Bush Snr’s lassies-faire attitude towards large corporations who were avoiding tax. They used several means to draw the elctorates attention towards it, including a host of ad campaigns

“This is the $825bn question. That’s how much foreign corporations operating in the US took in one year. But 72% of them didn’t pay a dime in taxes. Not one dime …” 

The real issue however lies with what Starbucks tell Her Majesty’s Customs & Revenue (HMRC) and what they tell their investors. There does appear to some inconsistencies with what is being said. In 2008, Starbucks filed £26m loss in the UK, yet their CEO Howard Schutlz told an analysts call that the UK business had been “so successful” he planned to take the lessons he had learnt there and apply them to the company’s largest market, the United States. One does not even know where to begin to try and understand the reasoning behind such a move. Such losses would be a grave cause for concern, yet Schutlz seems adamant to replicate this model in a substantially larger market. Schultz even promoted the person who oversaw this substantial loss, a man named Cliff Burrows. Schultz said he was looking forward to Burrows “now applying the same drive and business acumen to leading our US business.” This seems very odd.

In 2009, Starbucks filed a £52m loss whilst the Chief Financial Officer Troy Alstead proclaimed that operations in the UK were “profitable.” This is clearly a contradiction, unless he does not understand what profit is, because announcing such losses that are exactly double of their previous year and to describe overall activity as “profitable” is quite frankly a farce. In 2010, £34m in losses was announced and Starbucks informed investors that sales continued to grow. And just for good measure, in 2011 they announced losses of £33m and John Culver, the President of Starbucks’ International Division told analysts on a call earlier in that year “we are very pleased with the performance in the UK.” How senior figures and investors alike within Starbucks can continue to be unreasonably optimistic despite losses of £145m since 2008 should have rung alarm bells at HMRC, it did not.

If we look at Starbucks competitors such as Costa Coffee, they actually sold less than Starbucks. 2011 sales in Costa were £377m, whilst Starbucks reported £398m. Yet despite achieving greater sales, they incurred much higher costs, £319m that was more than three times that of Costa. Consequently, Costa paid £15m in tax to HMRC and Starbucks paid nothing. Obviously, both companies are separate and would certainly have completely different balance sheets, but Starbucks are the market leader in the UK for coffee, not only have they been around for longer, but they are also have a larger proportion of the market, so how despite greater sales, it cannot pay tax may be beyond the scope of this piece. Moreover, if we look at McDonalds sales since 2008 they exceed £3.5bn, they paid £80m in tax. KFC paid £36m in tax, with sales of £1.1bn; Starbucks paid £0 in tax despite generating sales of £1.2bn.

This episode does raise key questions that may not receive the attention it may ought to have. George Osborne gave a stern assessment of what a lot of people in the UK thought of the benefit system in his speech two weeks ago at the Conservative Party conference. Whilst he is entitled to his opinion on the matter, it would be refreshing to see the same energy exerted at a more comprehensive check on all corporations with regards to tax avoidance and the mechanisms a lot of firms have in place to purposely avoid paying the correct fee. This is not an emotive matter; this is simply an issue of paying what is right. Moreover, this will continue to occur unless more politicians highlight it and if there are the legislative amendments that will fix what appears the loophole that many large firms can exploit.

We cannot demand transparency from a private firm, they have no obligation to disclose such information, and we can however demand transparency from the elected officials who are meant to facilitate business, whilst holding them accountable when necessary.