Has The Government Improved The Standard Of Living In The UK?

With General Election campaigns well under way and the speculative dust settled from the 2015 Budget the timing is right for an analytical look at the coalition and their five-year premiership so far. This piece is not aimed at dissecting each manifesto claim made by the Tories, rather a commentary on living standards in the UK today.

Have the government’s policies actually improved the living standards of the average UK citizen?

Measuring living standards and the statistics and data used is critical to illustrate an accurate portrayal of actual living standards for the average person. Undoubtedly aggregate figures are important, especially when making macro comparisons with other economies. Nonetheless individuals should also be made aware with stats and figures they can truly relate to; GDP Per Capita figures give a clearer indication of this because they show the average wage per person. Moreover, people can see what the average person earns; they can also use the figure and compare how they are doing in comparison.

To arrive at a GDP per capita figure we take the Gross Domestic Product, (the sum of all work, spending and production) and we divide that by the total population we then arrive at a GDP per capita figure. This figure is a more accurate representation of the living standards for the average Briton as it provides the mean wage for everyone in the nation. Like all stats, always take them with a pinch of salt and never consider them to be final or conclusive, rather a useful analytical tool used to portray the bigger picture.

If we go back to 2009 the UK and most advanced economies were in the midst of the worst financial crisis since the Wall Street crash of 1929. I have opined my thoughts on the matter here and here. Prior to the hung parliament and David Cameron assuming leadership, Gordon Brown, the Prime Minister at the time and his Chancellor Alastair Darling, sanctioned tax payer’s money to be used on “bailing out the banks.” The term often used to describe the process that saw taxes being deployed as a monetary safety net for the struggling banks; banks that would have been crushed by their own recklessness had the tax funded finance package not arrived.

It is worth mentioning the background to the crisis in some minor detail as Prime Minister David Cameron has described this election as the “most important in a generation.” This is because the Tories have structured their election campaign on their idea of economic recovery and why continuity rather than change is required for the citizens in the UK. In the pre-election Budget Chancellor of the Exchequer George Osborne claimed, “Our economy had suffered a collapse greater than almost any country.”

Britain’s GDP like other nations suffered as a result of the global financial crash but can The Chancellor truly suggest that the financial crisis hit Britain as hard as some of the less developed nations such as Ireland, Greece or Portugal? The UK is not a Eurozone member, so it does not have to adjust economic policy in line with eighteen other nations, unlike the mentioned nations. In addition, nations such as France and Germany have higher GDP and GDP per capita figures than the UK. Both are members of what is clearly an unbalanced monetary union and still have had a stronger recovery in living standard terms since 2009.

Mr. Osborne added:

“Five years ago, living standards were set back years by the great recession. Today, the latest projections show that living standards will be higher than when we took office.”

At a time when the electorate needed reassurances and tangible evidence of a recovery it seemed a little odd to refer to living standard projections rather than the subsequent record during the coalition’s time in office. The graph below highlights GDP per capita from 2007-2014:

World Bank

As you can see in 2009 when the coalition took office living standards where at the lowest point on the range displayed. This is no surprise as the aftermath of the banking crisis combined with the deficit reduction policies imposed by the government caused a shock to the economic system. Since then living standards have been the lowest among Britain’s adversaries, Germany and France respectively. So it remains unclear what the Chancellor meant when he proudly professed “Britain was walking tall again.”

According to ONS figures, unemployment in the UK ( February 5.7%) is lower than France (10.6%), Germany (4.8%) has a lower rate however; but the news was welcomed by the coalition. With French unemployment higher than the UK’s it highlights the importance of looking at the average wage per person as opposed to other figures because they do not portray a clearer picture of living standards.

Unemployment figures cannot account for underemployment. Underemployment looks at labour utilization (how productive workers are) as opposed to just labour (people in jobs). For example, a PHD holder working in a fast food restaurant is said to be “underemployed” because they posses a skill set that exceeds their requirements for the role, yet they are employed nonetheless. An extreme example yes but the idea is to look at situations where highly qualified individuals are accepting roles where their skills are not enhanced or utilized. This is a likely factor behind the UK’s laborious productivity and why it can have more people in jobs yet lower wages for those workers. According to the Bank of England in their Quarterly Bulletin 2014 Q2

“Since the onset of the 2007-08 financial crisis, labour productivity in the United Kingdom has been exceptionally weak. Despite some modest improvements in 2013, whole-economy output per hour remains around 16% below the level implied by its pre-crisis trend.”

In addition to that, Stephanie Flanders writing in the Financial Times suggests:

 “That the average UK worker, in Yorkshire or anywhere else, now produces less in five days than a French one does in four.”

Clearly the recovery is not close to pre-crisis levels so the government has not raised living standards for the average UK citizen. With slothful productivity levels systemic of what little recovery the nation has seen, it is difficult to fathom how the Chancellor could be so optimistic when clearly the past five years have been subdued. Political rhetoric should not be confused with economic reality and the reality is clear: living standards in the UK are not close to pre-crisis levels.

How can the EMS crisis of 1992-93 crisis help the Eurozone today? Part 2

In my previous post I began by drawing some similarities between the EMS currency crisis of 1992-3 and the current Euro zone crisis today. This piece is a continuation of that discussion. I shall be elucidating further details on the EMS and shedding further insight on how the damage from the current crisis could have been reduced significantly.  

The Cypriot banking system not fared well throughout this episode.

The Delors report draws similarities to the Werner Plan[1] of 1969. Both proposals advocated for the idea of a united European union that would allow the movement of capital and labour to move with considerable ease, which in turn would be facilitated by the adoption of a common currency. Both documents are therefore imperative to the realization of the EMU. The current crisis in the Euro zone highlights some of the shortcomings of the proposals. Some of the recommendations that were encouraged in the Delors report could be viewed as potential reasons as to why the Euro zone is in a precarious position today. Firstly, the Delors report suggested the establishment of a European System of Central Bank (ESCB). Although it was and remains an exogenous agent of the European economic system, the similarities of other central banks stops there. Arguably, one of the most critical features of most a central banks is the fact that most central banks are the lender of last resort. The current Euro zone crisis has highlighted what can now be viewed retrospectively as a limitation within the Delors proposal. French monetary authorities have argued that the current Euro zone crisis could be aided significantly if the ESCB could buy Euro zone debt.

“The best way to avoid contagion in countries like Spain and Italy is an intervention or an announcement that a lender of last resort could intervene.” (Baroin 2011)

German authorities are notoriously opposed to debt monetization because of the inflation and therefore potential hyperinflationary pressures it could bring to the common currency. Therefore, the current crisis is a reflection that the ESCB do not have enough monetary control the deal with a crisis of this magnitude.

Both monetary and fiscal harmonization was not only a goal; it was a necessity if European ministers were to achieve their aim of a closer economic zone. If one is to critically assess the Delors report, it could be argued that there may have been too much of an emphasis on monetary integration and evidently not enough focus on fiscal integration. The Maastricht Treaty[2] however identified the need for fiscal stability within Europe and the Stability and Growth Pact (SGP) made several recommendations in order to promote both monetary and fiscal stability. Dimitri Syrrakos suggests that the SGP would prevent nations from needlessly resorting to certain monetary policies that could undermine the creditability of the common currency

“Once the countries were eligible to participate in the single currency they would not resort to policies based on monetary laxity, as this would damage the credibility of the new currency.”

The intentions of the SGP were understandable; any union that would amalgamate several contrasting economies needed a stringent fiscal framework in order for it to function appropriately. If we analyse the current EMU crisis, the authenticity of the SGP is in question because strict sanctions were to be imposed on any nation who did not adhere to the ‘strict’ conditions set by the EU. If this were the case then several nations including Germany, Italy and Greece in particular would have been punished appropriately for their fiscal mismanagement. Former UK Prime Minister John Major speaking to the Financial Times in November 2011 suggests that:

“Southern states over indulged on low interest-rates and racked up debts. When Germany and France over-stepped the criteria without any penalty by the commission, the criteria became toothless.”

It is fair to suggest with hindsight that sanctions on nations who had failed to abide by the framework set by the EMU would have almost minimalised the severe economic damage that has beset the Eurozone today. Had sanctions been imposed some ten years ago, or even five, then the severe problems that appear only to be appearing now could have been dealt with then.

 GDP to debt ratio (%) 2007-2010

Nation	2007	2008	2009	2010
Germany	65.2%	66.7%	74.4%	83.2%
Ireland	24.9%	44.3%	65.2%	94.9%
Greece	107.4%	113.0%	129.3%	144.9%
France	64.2%	68.2%	79.0%	82.3%
Spain	36.2%	40.1%	53.8%	61.0%
Italy	103.1%	105.8%	115.5%	118.4%
Portugal	68.3%	71.6%	83.0%	93.3%

With regards to the realization of the EMU, the SGP was implemented in 1997, ten years before the data range in the table. Despite a prerequisite of national debt being less than 60% of GDP levels, the table highlights the inability of Euro zone members failing to deal with nations not following the fiscal framework. This tacit failure to impose sanctions on members allowed certain members continue to let national debt to grow until it became an apparent and uncontrollable problem, hence, the systemic failure of the system itself. Clive Cook is one of several commentators who have critical views on not only the SGP, but of EU governance in general,

“Remember the EU’s vaunted Stability and Growth Pact of 1997, which supposedly put limits on public borrowing — and which Germany, by the way, violated? The same syndrome is evident today. Write a new rule now, worry about enforcing it later. This has been the hallmark of EU governance.”

Moreover, this has been a consistent theme that has underpinned EU and Euro zone governance. Despite apparent mechanisms being in place to prevent severe economic shocks, Euro zone nations appear to have repeated the same systemic errors, the only difference with the EMS crisis of 1992 and the current crisis is the severity, the current crisis however appears to be of a much greater magnitude.

The fundamental aim of the EMU was to integrate several economic zones, politically and more importantly economically in order to reduce exchange-rate uncertainty and provide a zone of cohesion as opposed to a network of conflicting monetary and fiscal interests. A solution to the current Euro zone crisis is not only the desire of policy makers, but it is a fundamental requirement because if the Euro zone were to collapse, the consequences would be catastrophic. Fiscal harmonization is required if the current Euro zone crisis is to be resolved, this was the case following the collapse of the EMS. The EMU may be politically viable because it has increased European integration, economically however it may appear no more than a ‘utopian’ idea. Dinan suggests the necessity of EMU was “debatable on economic grounds.” (Dinan 2005). Following the failure of the EMS, ministers appeared to recognize the errors that had damaged the economic system, and, policy appeared to identify the errors that had damaged the European economy. What is ironic about the current crisis is that there are a number of policy issues designed to prevent the problems that realistically could destroy the entire EMU or even the EU. Had the SGP rules been implemented, the problems that have only come to fruition in the last two years or so would have been tackled. The Euro zone crisis is an extraordinary economic crisis, whatever the outcome, European economics will never be the same again.

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[1] The Werner Plan could be seen as the prerequisite of the Delors report of 1989. They share similar themes and raise a number of concurrent issues, however, the adoption of the Werner plan’s proposals and subsequent dismissal in 1973 does suggest that Europe was not ready to adopt such proposals.

[2] The Maastricht treaty was based on the Delors Report and the main objective was to complete the market integration with the creation of the common currency.

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.

Read of the week

This is particularly tough as I know several people at HMV. It seems mistakes from the top of the business ultimately trickle down and affect thousands.

http://www.bbc.co.uk/news/business-21366009

The Writing On The Wall: Eurozone fail to take decisive action

Eurozone leaders tacit failure to take prompt action leaves Eurozone a long way from recovery.

The current eurozone crisis is not going to end any time soon. Despite Mario Draghi’s so-called “ice-cream,” a pledge by the European Central Bank (ECB) to intervene in the European bond market, the optimism was brief and the current crisis remains more potent than ever. What is most striking  are some of the parallels between the current eurozone crisis and the European Monetary System (EMS) crisis of 1992-1993 and more importantly, the inability of European ministers to act effectively on past mistakes.

Many Greeks and Spaniards have stoned police cars and set fire to shops to protest budget cuts, to little avail. Hitherto, the EMS crisis, although in hindsight is not of the same magnitude, relatively speaking, there are many mistakes that have been repeated during the current crisis. Interest rate harmonization across the entire euro-zone clearly does not work due to the structural imbalances of the Northern, wealthier states and the Southern, poorer states. Similarly, when the UK wanted to reduce interest rates during the 1992-1993 EMS crisis, they were prohibited, due to the dominance of the German economy (sound familiar ?) and when they maintained high interest rates due to several factors, including the reunification of East and West Germany it had a detrimental affect on the British economy. Moreover, this imbalance of economic performance requires a significantly tighter fiscal framework that will complement the monetary framework already in place, without this, the crisis will not be solved and this increases the possibility of another crisis reoccurring in the future. Furthermore, had Greek, Spanish, Irish, Italian and most European nations adopted a much stricter fiscal framework, then the problems of today would be severely reduced.

This has been the hallmark of the eurozone, austerity is the bitter medicine for over indulgence on cheap credit

It should be noted that the legal framework was already in place to circumvent nations from binging on cheap and available credit, but this has proven to be nothing more than hollow rhetoric. The ECB’s decision however to act as lender of last resort should provide the framework for the fiscal unity that the euro-zone has required since its inception. Monetary unity alone is not sufficient, both fiscal and monetary unity is required to harmonize the euro-zone. Nevertheless, by accepting the stringent fiscal reform package, the indebted nations will be relinquishing national sovereignty, which is a consequence of the over indulgence of available credit. Undoubtedly, these are the very beginnings of the proposed reforms and many citizens in the heavily indebted countries may not have the patience to wait until these reforms manifest into tangible results. This transition period marks a significant time for the euro-zone and many nations may feel time is running out. The Stability and Growth Pact was intended to penalize nations with a debt-to-GDP ratio greater than 60%. Clearly, the intentions were correct, but the implementation or rather, the lack of demonstrates the incapability of euro-zone leaders to take decisive action.

The intentions of the SGP were understandable; any union that would amalgamate several contrasting economies needed a stringent fiscal framework in order for it to function appropriately. If we analyse the current euro-zone crisis, the authenticity of the SGP is in question because strict sanctions were to be imposed on any nation who did not adhere to the ‘strict’ conditions set by the EU. If this were the case then several nations including Germany, Italy and Greece in particular would have been punished appropriately for their fiscal mismanagement. Former UK Prime Minister John Major suggests that:

“Southern states over indulged on low interest-rates and racked up debts. When Germany and France over-stepped the criteria without any penalty by the commission, the criteria became toothless.” 

It is fair to suggest with hindsight that sanctions on nations who had failed to abide by the framework set by the EMU would have almost minimalized the severe economic damage that has beset the euro-zone today. Had sanctions been imposed some ten years ago, or even five, then the severe problems that appear only to be appearing now could have been dealt with then.

Nations were meant to be punished if government debt-to-GDP exceeded 60%.

With regards to the realization of the EMU, the SGP was implemented in 1997, two years before the data range in the graph. Despite a prerequisite of national debt being less than 60% of GDP levels, the graph above highlights the inability of euro-zone members failing to deal with nations not following the fiscal framework. This tacit failure to impose sanctions on members allowed certain members continue to let national debt to grow until it became an apparent and uncontrollable problem, hence, the systemic failure of the system itself. Clive Cook of Bloomberg is one of several commentators who have critical views on not only the SGP, but of EU governance in general.

“Remember the EU’s vaunted Stability and Growth Pact of 1997, which supposedly put limits on public borrowing — and which Germany, by the way, violated? The same syndrome is evident today. Write a new rule now, worry about enforcing it later. This has been the hallmark of EU governance.”

Moreover, this has been a consistent theme that has underpinned EU and euro-zone governance (or lack of). Despite apparent mechanisms being in place to prevent severe economic shocks, euro-zone nations appear to have repeated some of the same systemic errors, the only difference with the EMS crisis of 1992 and the current crisis is the severity, the current crisis however appears to be of a much greater proportion, with the lasting effects significantly greater.

Clearly, the current economic crisis that is crippling the euro-zone could have been prevented if decisive action was taken to punish nations who did not adhere to the ‘strict’ rules set out in the SGP. Retrospective analysis does little to compensate the fact that the damage as a result of this failure has been catastrophic. There is no easy remedy; the euro-zone must comply with the reform package set out by the ECB in order to have the fiscal harmonization so desperately required in order to achieve the goal of a single currency. Without both monetary and fiscal unity, this crisis will occur in the future, and the consequences far worse, something that seems too difficult to comprehend at this moment in time.