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.

Scottish Independence: Be Careful What You Wish For

Scottish not British

This is a special piece about the SNP’s attempts for a Currency Union with the rest of the UK. It is flawed and the implications could be drastic. All patriotic rhetoric aside, the Scottish people should be careful of what they wish for.

Without question the potential breakup of the United Kingdom of Great Britain and Northern Ireland is a monumental and truly unique event. The Scottish people have been granted their request for the right as Scots to self-determination. This would result in much greater powers shifting away from Westminster and into the Scottish Parliament.

From an emotional and patriotic perspective their cries for independence are fully justified and understandable; the fact is Scotland was an independent nation a very long time ago. Most people in Scotland do not consider themselves British and feel disillusioned with the decision making process over four hundred miles away in Westminster. This is not a matter of mere geography, the distance purely emphasizes the point that they are culturally their own people.

It is this reason why the SNP have completely sold the Scottish YES campaign short by seeking a currency union with the England. If we analyse this call for ‘independence’ how independent can independence be if your currency; the common factor and medium that binds the market based society together, is determined by the same people you are claiming to want to leave? Surely that creates a more dependent nation than before?

Currency union is what the Eurozone is based on. Because the ECB (European Central Bank) controls all monetary policy (interest rates & supply of money) across the entire region. Nation states are rendered somewhat useless to self-determination when it comes to economic planning, specifically fiscal policy (government spending and taxation). Therefore, the ECB must always factor in contrasting economies when deciding what interest rates will be. Think of large economies such as Germany and France and then smaller economies such as Portugal and of course Greece.

Hypothetically, the ECB may raise interest rates across the Eurozone in order to curtail an economic boom. This could help the nations that are booming at a higher rate. Booming in the sense of higher and more potent economic activity. This is certainly possible when you look at just how different the economies are in the Eurozone. Some nations may benefit from higher rates of interest, whilst some may suffer. It will help some nations and hurt others.

This is a very realistic scenario for Scotland. All patriotism aside and let the facts dictate. Several businesses such as RBS, Lloyds, Standard Life and others have all stated they are in unwavering support of the Union and will leave Scotland if they get their independence. Firms such as Next and John Lewis suggest that Scottish versions of their stores could have to increase prices in order to maintain price stability with the rest of the union. Can you imagine Scottish people driving to Northern England just to save money for the same goods and services? This could boost England’s economy and deplete Scottish business in the long run.

There is a simple and rational solution and it is a genuine surprise that the SNP have not considered a fully independent Central Bank and Currency. Rather than seeking a currency union with the UK why not create your own? This is what a truly independent Scotland deserves. This hybrid, this poorly choreographed collaboration between two neighbours is not independence. It is dependence. This top-heavy relationship is highly unlikely to work for Scotland. As the evidence suggests for currency union in the Eurozone, (Greece, Spain, Ireland and Portugal) without fiscal AND monetary union determined by one single body tailored to the needs of your own economy there will ALWAYS be an imbalance. Mark Carney accurately described a currency union as “incompatible with sovereignty.” The SNP have however suggested a fiscal framework to avoid a Greek and Spanish like currency imbalance situation but it simply does not go far enough. The Union have made it clear what their view is and they want Scotland to remain. They have no obligation to make special arrangements for Scotland.

For true, unaltered and FULL independence Scotland require full control over both fiscal (government spending) and monetary (interest rates) policies. Without control over both Scotland need to ensure they have enough of a thriving and stable market to ensure their economic activity does not stray too far from that of England if they want to use the Pound Sterling. It will be very difficult to maintain that balance however, especially considering the unwavering stance from the Union.

Being Scottish is of the heart and mind and not necessarily of the ballot. Of course officially being an independent nation and having full national recognition is something to savour and for Alex Salmond, he gets to write his name into history forever. It should be approached with caution because the SNP’s approach lacks the real vision and authenticity the Scottish people deserve. If the Scottish economy does not create enough well paid and productive jobs in both short and long-run, if it does not open itself for real and beneficial investment then Scotland will suffer.

 

Good luck to the people of Scotland no matter what the outcome.  

 

Tricky Situation

Government’s current stance with regards to the potential Pfizer takeover of AstraZeneca sends mixed messages about UK recovery. 

Chairman & CEO Ian Read

David Cameron’s stance with regards to Pfizer’s potential takeover of AstraZeneca is somewhat peculiar. Research & Development especially in the Science industry signals innovation, persistence and longevity. Therefore the employment associated to the Science industry appears to be the kind that the UK economy desperately requires in order to aid the fragile recovery. The anomaly comes as a surprise because both the Prime Minister and the Chancellor favour a takeover bid from US firm Pfizer, albeit with “more assurances” from Pfizer. The government are of course powerless to stop the takeover and Pfizer have no obligation to pander to Westminster’s requests, still, supporting a takeover bid that is most likely to remove highly skilled jobs away from the UK is not exactly a favourable position to adopt. More potently, the wrong message about the UK labour market is being sent.

Pfizer Chairman Ian Read will have fully comprehended the saving potential by transferring 20% of AstraZeneca’s R&D department to a more cost-effective location. Pfizer shareholders will support the move away from the UK as dividends will rise due to the vast savings, an estimated £595million will be saved if the Pfizer manage to forsake the UK for a more cost effective location. Savings on such levels will provoke a reaction from shareholders who will always look to maximise their dividends. It is their right to exercise that privilege and governments are powerless to stop such an action. It should be noted however that sovereign governments have a debt to its citizens to ensure that everything is done to at least show firms why the UK is an attractive place to conduct business. To stay silent would be questionable; supporting the bid that possibly ends some 6,700 jobs in such a specialist and labour-rich sector such as Pharmaceuticals is a surprise. When one considers the economic rhetoric propagated by the government has been focused on full employment, safeguarding highly skilled jobs should subsequently be high on the list of priorities for the government.

Shadow Business Secretary Chuka Umunna said the assurances Pfizer had given ministers were “not worth the paper they are written on,” as it had declined to rule out breaking up AstraZeneca in the future.

“The government could act immediately to work to put in place a stronger public interest test encompassing cases with an impact on strategic elements of our science base and seek a proper, independent assessment of the potential takeover as Labour has called for. Instead, ministers have sat on their hands.”

Although it is the job of the opposition to opine an alternative perspective to that of the government, Chuka Umunna’s point does reflect the public interest and the Society of Biology, Biochemical Society, British Pharmacological Society and Royal Society of Chemistry all reflect his views. Nobel Prize winning Professor Andre Geim “fears” for the future of R&D in the UK. They all concur that recent mergers have led to firms seeking economies of scale, simultaneously translating to laboratory closures and job losses. This makes it even more astonishing that the government would encourage this particular takeover.

Hitherto both the Prime Minister and the Chancellor have maintained their faith in British business, especially in creating long-term employment opportunities. Just last month the Chancellor pledged to “fight” for full employment and of course he was referring to employment on a much larger scale. In the case of Pfizer, some 6,700 jobs could be lost. This case is more poignantly about what kind of message the public receives. Economies need something that is not tangible to fully recover and that is confidence. This contradiction does make the government look somewhat inconsistent. Had the government distanced itself or highlighted some of the features that make the UK an ideal place to conduct business, features such as the lowest corporation tax in the EU or Universities with rich heritage and so on it could at least tie in with the other messages they are sending about the recovery. Its current stance however leaves them looking somewhat flustered.

 

 

Read of the Week

This is an excellent piece relating prostitution and the public sector cuts. This blog is intended to highlight how significant economics and economic decision making is and how it affects every aspect of society. Thus, no part of society is exempt.

http://blogs.independent.co.uk/2013/05/01/prostitutes-and-the-recession-how-david-cameron%E2%80%99s-cuts-are-affecting-british-women/

Is Justice Reinvestment a viable solution to the UK Prison Crisis? Part 1

Getty

The following is part one of a special look at the prison system in the UK. The prison population is near full capacity and incarcerating criminals is an arduous and expensive process. Justice Reinvestment seeks to allocate resources away from building and funding of prisons and looks to invest resources into greater societal schemes that could prevent crimes in the long term.

Justice Reinvestment (JR) is a simple concept, reallocating resources away from prisons and investing funds into societal schemes. The resources invested are aimed at eradicating the problems that lead onto criminal activity before they manifest. That should result in the long-term reduction of the number of incarcerations. The prison system in general is wasting resources and failing to tackle the long-term problem of reoffending.

There are currently 84,000 prisoners in the UK, full capacity, despite household and violent crime falling by 46% since 1995. Sentencing has not followed in the same direction. The inverse relationship between the drop in crime and rise in incarcerations highlight the odd relationship between high sentencing and fall in crime. Crime has fallen yet more people have been sent to jail.

Clearly the current prison situation is both inefficient and ineffective as greater emphasis should be devoted to criminal prevention rather than punishment, tackling the act once it has occurred may “solve” the crime, but the greater problem of why an individual or group have committed the crime itself highlights the need for a substantially greater understanding of crime prevention. The current prison system does not tackle crime prevention very well.

Philanthropist George Soros and his firm Open Society first expressed concerns with regard to similar problems within the US penal system, Allen and Stern suggest,

“George Soros has been questioning the cost of maintaining the current unprecedented level of imprisonment in the US and asking whether a redirection of resources away from criminal justice and into social, health and educational programmes might not make a more effective long term contribution towards creating safer and stronger communities.” (Justice Reinvestment – A New Approach to Crime and Justice 2007)

The concerns raised here share similarities to those being expressed in the UK, hence why JR could provide a realistic solution to the current penal crisis.

The prison crisis in the UK is the manifestation of both the latter stages of the John Major government (1990-1997) and more significantly Tony Blair and Gordon Brown. (1997-2010.) The manifesto promise of not only being tough on crime and more significantly the causes of crime, the current prison crisis has not benefitted from their efforts.

“On crime, we believe in personal responsibility and in punishing crime, but also tackling its underlying causes – so, tough on crime, tough on the causes of crime, different from the Labour approach of the past and the Tory policy of today.” (Labour 1995)

The idea of JR would appear to adhere to the Labour manifesto of 1995 that promised to act on the causes on criminal activity. The proactive approach is likely to provide remarkable knowledge on reoffending. The data could prove pivotal for identifying patterns and relationships between the criminal and their background. Identifying certain traits in societal behaviour would provide insightful knowledge on reoffending and resources would be in place to tackle it directly.

The crisis could be viewed as a simple problem of demand being greater than supply. Half of all prisoners reoffend. This has increased pressure on the prison system to reduce overcrowding so that prisons not only punish, but educate, rehabilitate and reform prisoners so that they can reintegrate themselves back in society reformed and not reoffend. Currently, resources are at full capacity and the prisons are struggling to provide those services due to the sheer numbers of incarcerated. The revolving door culture with criminals is putting further strain on the troubled economy. JR provides insight in reducing the long-term problem of high reoffending. This is by no means a short-term solution; it requires a more long-term approach and immediate reoffending rates are not likely to fall dramatically. However, what JR would provide is an in depth understanding of the why reoffending is so high.

No room left.

For several years tough on crime or zero tolerance translated into imprisoning record numbers of criminals. Also, building more prisons appeared to offer the solution to the growing demand for prison space. All of this occurred whilst criminal activity was falling. In hindsight, it would appear that the government at the time appeased the general public’s call for the justice system to be tough on crime. JR would provide a viable alternative to the current problem, which would appear to be a problem with central legislation and the general short-sightedness of politics in the UK, local government require much greater micro control over released prisoners. With greater control, local authorities could look to improve certain areas that are disproportionally represented in prisons and look for those funds to help improve the affected regions. It may seem unlikely at this point, due to the scope of the project. Nonetheless, stiffer discussions in Parliament should take place. The most recent reshuffle saw David Cameron remove Kenneth Clarke and replace him with Chris Grayling. Many view this move a political move to the right. Clarke was rather too ‘liberal’ for many Tories who favour a hardline approach. Robert Winnet of The Telegraph suggests

“His [Ken Clarke] pro-European stance and relatively liberal views towards criminal justice have brought him into conflict with Mr. Cameron and other senior Tories” 

In addition, for true justice, emotion (which public opinion is mainly driven by) must be removed in order to maintain the authenticity and the impartiality of Justice. However, the nature of the political system in the UK requires politicians to be rather myopic with long-term decisions.  This emphasizes why JR could offer a viable solution for the capacity problems in the UK.

Albertson and Fox highlight the fact that public opinion appears to at least be shifting towards policies that would appear to support many of the ideas and suggestions that are presented in the Justice Reinvestment proposal.

“The public do not rank prison highly as a way of dealing with crime. Most think that offenders come out of prison worse than they go in.”

What this shows is that the public is aware of some of the immediate concerns regarding the penal system, reinforcing the need for desperate reform. By the same token however, there does appear to be a ‘stubbornness’ or lack of understanding from large sections of the public with regard to criminal justice and members still believe that sentences are too soft. The former Justice secretary Kenneth Clarke nonetheless was advocating for substantial change to the current penal system. In an interview with The Times in 2011 he not only expressed concerns over the cost of the current penal system, but also the conditions of prisons in general.

“Prisons are financially unsustainable. It is just very, very bad value for taxpayers’ money to keep banging them up and warehousing them in overcrowded prisons where most of them get toughened up.”

Whilst Clarke’s concerns regarding the aggregate cost of the prison system in the UK is justified due to the current state of the UK economy, implementation of Justice Reinvestment would require centralized power from national government being transferred to local government. This would involve “substantial transfer of funds.” (Allen and Stern 2007) The criminal system and local governments are not exempt from the public sector cuts. This outlines why JR moves funds around, rather than demand more. So it is a question of where those funds go.

Clarke’s main concerns appear to be surrounding the aggregate cost of the current penal system, it does display why the current system is simply not sustainable. JR explicitly states that local authorities will have greater micro control over how funds are utilised. In theory at least, this would present a viable alternative to the current, unsustainable system.

In part 2 I shall look into the prison population further, look at JR in more detail and arguments against JR. 

Do right wing parties become more popular during economic downturns?

Golden Dawn: Their sharp rise has occurred during the worst economic crisis since The Great Depression

Clearly the global economy is disarray. Several large economies around the world have still not resumed their pre crisis levels of output and that does not appear to be changing anytime soon. This has several consequences, unemployment across the world, especially in Europe is high, people have less disposable income so spending levels are lower and there seems to be rising support for right wing politics. This has led me to ask a question: do right wing political parties become more popular during periods of economic upheaval? My answer is yes.

Economic stagnation or downturns are periods in which more people lose their homes, credit is harder to obtain, several businesses close down, unemployment & underemployment rise and disposable income is reduced. They occur during an economic upturn, however, the positivity during an upturn far outweighs the negativity, so the effects are minimalized. So if we take the UK for example and we look back during Tony Blair’s premiership, the economy was booming during most of his time, with exception to the downturn of the early 2000s, (dot com bubble) post 2002 the economy is performing well. At the time Britain was pro E.U. and pro immigration and a lot people were contempt to allow migrant workers to come to Britain. Nobody can escape the UKIP hysteria; they were often ridiculed as just another political party whose views on immigration and E.U. membership were extreme. Now Nigel Farage has David Cameron looking over his shoulder. The progress UKIP have made since the credit crunch has been nothing short of remarkable. In this age where the main political parties have lost connection with several disillusioned members of the public, UKIP represent boldness and consistency. But their views are more acceptable during a time of economic disarray. They are saying nothing different from ten years ago, they were anti-E.U. then and they are now. They were anti-immigration then and they are now. And migrant workers coming into Britain is not a recent phenomenon, yet there surge in popularity has transformed them from just another political party comprising of disgruntled former Tories into a real pain to the three main political parties. Moreover, their MEP seat looks secure and a recent YouGov opinion poll shows that public opinion is on their side and politically, immigration is such a contentious issue, politicians know they must tread carefully around it, often lacking the boldness UKIP has, hence there surge in popularity.

UKIP leading the way according to poll                                                     YouGov

 This surge has stemmed from the fact that the large public sector cuts have affected millions of people. This is on the back of the huge bank bailouts ordered under Gordon Brown for several failing banks and the fact that the large public sector deficit does not appear to be reducing. Economically the UK has a long way to go. It certainly has a huge effect on people’s lives, their mood, thoughts and actions. People think differently during recessions and downturns and this is reflected on the political landscape. Politics provides the avenue in which any citizen can protest against political actions and clearly people are speaking out against the way society is today. And this is because the economy is in such a dire situation.

 Last year in France, François Hollande won the general election. By defeating Nicolas Sarkozy he was elected President. One could suggest that many French voted out of protest in order to remove Sarkozy due to the problems in the economy. The French had similar concerns to the British, mainly regarding its economic woes and social problems based around immigration. Moreover the real story of this election was Marine Le Pen, leader of the far-right group Front National (National Front.) Of the 35,883,209 who voted, the Front National received 6,421,426 of the votes. So 18% of the votes went to a far-right political party. Thus the Front National came third overall. Again, their clear policies struck a cord with over six million people and this was their best election result to date.

The Euro Zone has come close to collapse and nowhere has that been more apparent than in Greece. Greece has always had high levels of public expenditure and around 10% unemployed for the last ten years, so this has added to the high national debt. Who should be blamed is not the issue at hand? If anyone should take responsibility it is the Greek politicians, for overseeing the mess and allowing public finances to spiral out of control. in the midst of this the far-right party Golden Dawn has had a huge impact on Greek politics, their surge in popularity certainly provide and sometimes channels the energy the recession has created. Their anti-immigration policies, much like Front National and UKIP have resonated with people and have provided them with the platform in which they hope to gain considerable election success.

If we look at the UK again, much of what the BNP said about immigration is not that different from what UKIP opine. Where they are on the political spectrum is different fair enough, but in terms of both being anti-immigration they are virtually the same. Yet the BNP was close to bankruptcy and UKIP appear to be going from strength to strength. Times have certainly changed. In an economic downturn people may have less patience for issues such as immigration, social housing and the provision of social services such as education and health care. This is usually because tax receipts have shrunk as a result of higher levels of unemployment, public sector cuts and less activity in the economy as a whole. So people may feel that domestic policy ought to prioritise its national citizens before seeing to the needs of others. What does not garner the same emotion from public attention are the benefits immigrants usually bring to communities. Ethnic minorities make up 6.24% of the Greek population. This figure has been growing steadily, but up until 2005, Golden Dawn were not the force they are now. The Greek economy has rotted since and the popularity of not just Golden Dawn, but right wing politics, especially in smaller parties, has gathered loyal cult followings, what they hope is that it manifests into tangible political success. They are at the very least making their bigger counterparts take notice, especially at local elections.

Personally, I think UKIP and the surge in popularity in far-right political parties highlight the sad state of politics in the UK and the rest of Europe today. However, I genuinely believe in freedom of political expression. For me UKIP provide more problems than solutions because they are virtually a one-policy party and I am yet to be convinced what they would do if the UK were to leave the E.U. In the case of the Front National in France, Le Pen was recently voted the most popular French female politician so she does not look to be losing any momentum.

I am confident that if the global economy was in a better state, more people had jobs and more money in their pocket then I can’t see where the far-right could get their impetus. Blaming immigrants for instance is a weak and flawed argument for the UK at least. There is no doubt that immigrants reduce the cost of labour, but the problems in the UK are more complex than blaming one group. Maybe the UK has got too many immigrants, but what I am certain of is this issue is not a simple case of close the borders and the problems will disappear. I would personally like to see the same energy exerted towards tax avoidance from large multinationals because that could potentially recoup billions in tax revenue.

How UKIP and other right wing parties perform in the next series of elections should be interesting, if the economy is still as sluggish as it is now, I predict well, and if the recovery is looking strong then I don’t think they’ll do that well. My only hope is that the economy starts to show real signs of growth and it will be interesting to see how the right reacts to that.

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.

http://news.bbc.co.uk/1/hi/uk_politics/6975536.stm

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.

Privatisation is Justified… Only if it results in competition.

There is very limited choice in many of the privatised industries including rail.

Privatisation in the UK during Margret Thatcher’s premiership was intended to shift the economic burden away from taxpayers into private hands. It was intended to erode the natural state monopoly and establish market-based competition. Economic theory suggests that privatisation eradicates the state owned monopoly and creates competition in the market, which should lead to better services and a lower cost. Government led businesses are said to be inefficient at providing services that a private led firm can do, so the appeal is certainly there.

Nationalised industries tend to provide goods and services with high social value, goods such utilities, agriculture and transport tend to be provided by the state because these derived demanded goods are viewed as essential. Unlike firms, the state’s intention is not to maximise profits, so there are no shareholders to appease, nor answer to. This has its advantages and disadvantages because constantly operating at a loss will impose a burden on the taxpayer, who may feel their taxes would be best utilised elsewhere, where there taxes are not being wasted.

This was central when Thatcher and her government suggested that a wave of privatisations across various sectors such as transport, telecommunications and utilities were the best way to reduce the burden on taxation and the optimal way for consumers to be provided with essential goods and services. The state was viewed as a natural monopoly and the highest consumer satisfaction and utility is gained through competition, it is competition that yields the greatest efficiency and the lowest possible prices. Therefore, establishing competition through several competing firms was central to this proposal. Economists Todaro and Smith suggest,

“Proponents [of privatisation] suggest that it curbs government expenditure, raises cash to reduce internal and external debt and promotes individual initiative while rewarding entrepreneurship”  

Clearly the benefits of privatisation are clear, the eradication of the natural monopoly is perhaps the strongest because it opens the market and allow more firms to compete. However, in the UK this unfortunately has not been the case. The wave of sell offs during the 1980s continues to have a significant effect on life in the UK today. Services such as gas were privatised, so was telecommunications and parts of the rail industry. Some twenty years later after firms such as British Telecom (BT), British Gas and regulatory bodies such as Network Rail not only stifle competition, but they appear to have replaced the very monopoly it was created to replace.

John Moore was the Minister in charge of initiating the wave of privatisations. He said in 1983

“The long term success of the privatisation programme will stand or fall by the extent to which it maximises competition. If competition cannot be achieved, an historic opportunity will have been lost.”

He said at the 1983 Conservative Party conference:

“Our aim is that BT should become a private sector company…[but] merely to replace state monopolies by private ones would be to waste a historic opportunity. We shall continue our programme to expose state owned industries to competition.”

Moore explicitly states if privatisation cannot lead to a competitive market “an historic opportunity will be lost.” I could not agree more because had the privatisation initiatives been applied appropriately, with legislation implemented to prohibit cartels forming in the case of the rail industry or outright monopoly, like BT in the telecommunications market then these formerly stated owned industries would have created far more jobs on the sheer fact that the market would be significantly larger, they also would have lower prices. And they would have lower prices because there would be ten or more firms each competing to try and get customers, so lowering prices in order to attract custom. If however there are two or three firms, then they are more likely to collude, whether it is explicit or tacit, the outcome is the same and it is near impossible to detect.

Commentator John Gamble stating in 1994

“When BT, BG and the water industry were divested, the Conservatives failed to liberlise their markets meaningfully and as a result, were forced to create regulatory mechanisms and institutions to prevent the utilities from abusing their positions.” 

I mentioned in my piece about regulation and the above inflation gas price increases and how regulators in many instances interfere with business activity and can actually do little to prevent firms from these price changes. It should be noted that the way a customer will have low prices is through competition. That was the reason why Mrs. Thatcher sold off many state controlled firms, but we are seeing today that the state monopolies have been replaced by cartels and monopolies in some cases. Moreover, this is conflicting to what was proposed. One could even suggest that a return to state operated firms were better, because at least they are accountable to the public. Private cooperations are accountable to shareholders are not obliged to disclose information to stakeholders.

Privatisation in the UK does appear to have shifted from natural monopolies to private monopolies in the case of BT and oligopolies in the case of Network Rail, British Gas and so on. Clearly, this is the oligopolistic market structure is not competitive and fails to provide sufficient customer choice. Customers are therefore left to demand essential goods from limited suppliers, resulting in high prices. Unless privatisation leads to a highly competitive market, with several competing firms, it is merely replacing the very entity is supposed to be replacing.