Archive for July, 2009
Friday, July 31st, 2009
The tax and benefit system is obviously working in the UK to redistribute income between the rich and poor, but is it working well enough?
When we look at original income, that is income received before the impact of tax and benefits, the top 20% of households in the UK in 2007-08 received approximately 16 times more than the bottom fifth. In monetary terms this reflected average income differences between the top and bottom quintiles of £72,600 per household to £4,700 per household.
However, after redistribution via taxes and benefits, the ratio between the top and bottom fifths is cut to four-to-one, with average final incomes of £52,400 and £14,300 respectively, according to figures just published by the Office for National Statistics.
The latest situation can be seen in the figure below which shows average income per household in the UK for 2007-08.
 Source: ONS
The question of whether redistribution has gone far enough (or even too far) will depend on one’s political stance. Does higher taxation reduce incentives to work and innovate and so reduce potential output in the UK? Are welfare benefits acting as a disincentive persuading some to remain out of work? Or, is a ratio of final income of four-to-one between those at the top and those at the bottom of society unacceptable?
I have come across at least one case where my attempts to employ someone failed because they were going to lose more in benefits than they were going to gain in income. This suggests that there are still “marginal” problems between incomes received in work and out of work.
Cash benefits such as Pension Credit, Income Support, Incapacity Benefit and State Retirement Pension are the key measures in reducing income inequality. Together these make up 58% of gross income for the poorest fifth of households, 36% for the next fifth and only 2% for the top fifth of households.
Apart from Council Tax, all direct taxes are progressive in the UK, taking a larger proportion of income from those that earn the most. In 2007-08 those in the top fifth of households by income paid 25% of their gross income in direct tax, compared to 11% in the bottom fifth.
However, we still operate Value Added Tax, although at a reduced rate of 15% at the moment and other excise duties, which are regressive in nature. Indirect taxes take a higher proportion of income from those on the lowest incomes. We, therefore, have a system whereby one set of taxes is working to reduce inequality and the other set is working in the opposite direction. According to the ONS: “…the tax system as a whole has a much smaller effect on inequality than cash benefits.”
Tags: direct taxation, Household income, indirect taxation, progressive taxation, redistribution, regressive taxation, tax and benefits
Posted in Household income, taxation | No Comments »
Thursday, July 30th, 2009
The Women and Work Commission was established five years ago to put forward ideas on how the gender pay gap could be reduced and published a major report three years ago. Yesterday, they put forward an assessment of progress to date. The report said: “…while progress has been made in some important areas, much more can and should be done to unlock women’s talent. If this is done, the UK economy could benefit by up to £23 billion. …Action must be taken now, across many areas, to narrow the gender pay gap and utilise the skills, talents and abilities of women.”
The Commission noted that women were still being paid much less than men. On average they were paid 22.6% per hour less than men. Whilst this has fallen from 27.5% ten years ago it had still risen slightly from the 21.9% recorded in 2007. When looking at the gap in full-time pay this was now 12.8% but had also risen from 12.5% in 2007. The report said that the pay gap “stubbornly exists despite monumental changes in women’s position in the workplace.”
 Women still being held back from climbing the workplace ladder
A major problem was detected in careers advice in schools and the resulting “occupational segregation”. The Commission said that: “…we feel that the Department for Children, Schools and Families needs to make breaking down gender stereotypes for those below the age of 14 a much higher priority.”
Further evidence of the gender pay gap was provided by the executive jobs website “Experteer” which issued a press release on Monday headed: “Female execs progress earlier but paid less than male colleagues.” Their research found that whilst women attain senior positions at a younger age they are far less likely to hold such positions than their male colleagues and are likely to be paid less. They said that there are ten times fewer female Managing Directors than there are male and they are paid on average a sixth less, missing out on a potential £13,000 a year each.
Experteer found that across all executive roles the UK pay gap average is seven per cent. This compares favourably to Experteer’s research across other Western European markets, such as Germany, France and Italy, where an overall average salary gap of 12% in favour of men exists.
Experteer’s Managing Director, Torsten Muth said: “These figures raise some serious questions about sexual equality in the workplace. Whilst the UK is ahead of the rest of Europe, it is clear that talent is not the only factor in determining salaries and career progression.”
All this research shows that while some welcome progress has been made in terms of gender equality the “glass ceiling” has yet to be breached on any significant scale.
Tags: Gender pay gap, glass ceiling, women in employment
Posted in Gender pay gap | No Comments »
Wednesday, July 29th, 2009
House prices rose in June by 0.1% compared to the previous month according to figures released yesterday by the Land Registry. This is the first time that the monthly change has been positive since January 2008.
There have been occasional months recently when both the Halifax and the Nationwide indices have shown an increase in house prices. However, both these indices measure house prices when mortgages are initially approved. By contrast, the Land Registry only measures prices on actual sales and is therefore considered to be the most accurate measure.
Whilst this is good news it is still sobering to note that the Land Registry figures show that house prices have fallen 14% over the past twelve months and the average property value is now shown to be £153,046. Decreases have been universal across the country although the steepest regional fall has been -15.9% in the north east. Overall, the town of Luton experienced the biggest price fall with a drop of 23%.
In the 10 regions of England and Wales measured by the Land Registry, half recorded price increases in June whilst the other half experienced falls. The highest rise was the 2% in London, and the lowest was a fall of 1.2% in Yorkshire and Humberside.
The Land Registry was cautious concerning this positive upturn in prices saying: “…as the monthly increase is only 0.1 per cent, the movement does not signal a return to solid growth, but rather flattening prices.”
As far as the housing market as a whole is concerned the Land Registry’s latest figures show that between April 2008 and April 2009 the number of completed house sales fell by 42% from 62,393 to 36,233.
Tags: house prices, housing market
Posted in Housing | No Comments »
Tuesday, July 28th, 2009
In general last year most crime categories fell or were stable. However, there were significant increases in fraud, forgery and shoplifting, according to the British Crime Survey published by the Home Office.
This may be revealing the “green shoots” of an increasing crime spree. As more people have to cope with unemployment and poverty and firms find themselves on the edge of bankruptcy, there are indications that more people are turning to crime.
The figures show that last year shoplifting rose by 10% and fraud and forgery were up by 5%. At the same time victims of plastic card fraud increased by 6.4% and robberies of business property rose by 2%.
Alan Johnson, the Home Secretary, not surprisingly said that the government would “get tough” on what he called the rise in “acquisitive crime” which was linked to wider economic problems.
Because firms are now examining more carefully the movement of every penny through the company’s books, it may be that the increased fraud represents an “increased discovery of existing fraud.”
This is obviously worrying for business. In fact I hear that one large company is taking this situation so seriously that they have informed their senior executives that every time they buy a politician they absolutely must get a receipt.
Tags: business crime, recession
Posted in recession | No Comments »
Monday, July 27th, 2009
Preliminary figures for the second quarter of 2009 show that UK GDP fell by 0.8%. This compares with a decrease of 2.4% in the first quarter. Most forecasts were surprised by the drop as many had been expecting a fall of about 0.3%.
This means that the UK economy has now contracted for the fifth consecutive quarter and has fallen by 5.6% over the past year twelve months, which is the worst annual decline since 1955 when comparative records began.
The Treasury predicted in April’s Budget that the economy would contract by 3.5% during 2009 which means that any upturn will now have to be much stronger than previously anticipated. If the predicted figure is not reached this will have an important effect on the level of both the amount of money coming in from taxation and the amount going out on welfare benefits. This leads to the possibility that public sector net borrowing may have to exceed the projected £175bn for the current fiscal year.
The recent trend in GDP can be seen in the figure below.
 Source: ONS What sectors contributed to the ongoing fall in GDP? Well, most sectors were affected. The construction industry bore the brunt of the decline falling by 2.2% in the second quarter. Manufacturing also continued to fall by 0.3% and even the service sector, which is the most important in the economy, fell by 0.6%,
It will be interesting to see whether the Bank of England decides to increase its programme of quantitative easing. It still has the capacity to inject a further £25bn into the economy out of the original £150bn that the government gave it permission to use. On top of this the Bank could ask to raise the total amount of increased money flow which it has been injecting into the economy above the level which has already been sanctioned.
Tags: economic growth, GDP, public sector net borrowing, quantitative easing
Posted in Bank of England, GDP, economic growth, government borrowing | No Comments »
Friday, July 24th, 2009
The answer is a resounding “yes” according to research just published by the Centre for Research and Analysis of Migration (CReAM) at University College London. They analysed immigrants from the so-called A8 countries from Central and Eastern Europe, which joined the EU in May 2004. These countries include the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Slovakia, Slovenia and Poland.
The research covered more than half a million immigrants from these countries that came to the UK between 2004 and 2008. According to the study, A8 immigrants who arrived after EU enlargement in 2004 and spent at least one year in residence here – which meant that after that time they were legally entitled to claim benefits – are about 60% less likely than UK natives to receive state benefits or tax credits or to live in social housing.
 Immigrants from the EU's Central and Eastern European countries are making a very positive contribution to the UK economy.
On top of this, A8 immigrants made a positive contribution to public finance. In the latest fiscal year, 2008-09, A8 immigrants paid 37% more in direct or indirect taxes than was spent on public goods and services which they received. This is particularly remarkable as the UK was running a budget deficit during this period. At the same time, individuals born in the UK contributed 20% less to the exchequer than they received. The main reason for this is their rate of labour force participation. Immigrants from the A8 countries have employment rates of 90% for men of working age and 74% of women, which compares with 78% and 71% for natives.
Prof. Christian Dustmann, director of CReAM and co-author of the study is optimistic about the future contributions from immigration saying: “A8 immigrants are on average more educated than natives and figures show that they experience rapid wage growth during their stay in the UK. We should therefore expect their tax payments to increase considerably over the next few years.”
Tags: EU, Immigration
Posted in European Union, Immigration | No Comments »
Thursday, July 23rd, 2009
UK public sector net debt reached a total of £799bn in June 2009, compared to £641.4bn in the same month last year, and was the highest level since records began in 1974. This outstanding debt amounted to 56.5% of Gross Domestic Product, which compares with 44.4% in June 2008. When the intervention in the financial sector is excluded, net debt stood at £657.5bn in June 2009 which amounted to 46.6% of GDP.
Net borrowing in June 2009 was £13.0bn which compares with £7.5bn in the same month last year, although the figure was lower than the £15.5bn which many analysts had been expecting. Overall it looks as though the Chancellor, Alistair Darling may well meet his forecast of total net borrowing of £175bn this financial year.
 Government finances are continuing to worsen
The public finances are obviously in a parlous state at the moment and some hard decisions will have to be faced – although it is likely that no-one will address them publicly until after the general election next year.
The main reasons for the current problem are the fall in the tax take and the rise in benefit payments, although we shouldn’t forget the government’s spending spree in recent years. The National Audit Office has just said that tax receipts fell by 5% last year. Taxpayers paid the Treasury £435.7bn in 2008-09, compared with £457.4bn in 2007-08. There were falls of £6.1bn in stamp duty payments due to the collapse in house sales; £5bn lost in corporation tax, mainly in the financial sector; £6.4bn less in VAT, partly due to the cut in the rate of VAT to 15% last December, plus the fact that shoppers are cutting back; and a drop of £5.7bn in income tax and national insurance contributions as workers lost jobs and bonuses were cut back.
At the same time the government is having to spend more on unemployment and other welfare benefits and is currently spending £13.50 for every £10.00 which it raises in tax. The general feeling is that it will take at least five years of spending cutbacks allied to economic recovery before the government finances get back to where they were two years ago. Some forecasters are even more pessimistic than that.
Tags: government borrowing, government revenues, government spending, taxation
Posted in government borrowing, government spending | No Comments »
Wednesday, July 22nd, 2009
Apologies to everyone following my blog, but yes, I came down with swine flu last week. I’m not apologising for being ill, just for not being able to continue blogging.
If you haven’t caught it yet I can only say it was a lot better than when I had glandular fever. Worst symptoms were a temperature that spiked at 39 degrees C, (or 102.2 F if you prefer) followed by periods of shivering and heat. On top of that was muscle ache (at least I know I’ve got some now) and general lassitude. I was too late for tamiflu because I had struggled on for the first 48 hours not realising what I had – although the clinician said that the drug can have nasty side effects and it is better to get through it on you own if you can. The last two days I have been perfectly well but asked to stay in isolation until today when I was allowed back to work.
However, enough of me, what about the economy? Although I only made a small gap by my absence at work (did anyone realise I wasn’t there?) I did contribute to a drop in productivity by my absence. But what effect could this pandemic have on the economy as a whole?
This week the Ernst & Young Item Club published their forecast for the UK economy. In it, they note that the H1N1 virus poses a serious risk to the economy. They have assumed that a pandemic infection lasts for six months from August 2009. The infection rate is assumed to reach 50% and the mortality rate 0.4%. They note that this will have an impact on both the supply side and the demand side.
On the supply side, the effect would be from employees staying off work because they or their dependents were ill. On the demand side there would be cuts in discretionary consumer spending on goods and services such as restaurants, travel and tourism as people kept clear of public places. This would have a knock-on effect due to the uncertainty it was creating and would probably result in businesses postponing investment projects. The ITEM club estimates that such an epidemic on its own would cut 3% from UK GDP in 2009 and a further 1.7% in 2010, causing maximum disruption to an economy which would be on the verge of recovery. This might lead to a drop in output which would rival that experienced during the Great Depression in the 1930s.
You may have seen the news yesterday that scientists at Imperial College, London have suggested that a closure of schools in the autumn would slow the spread of the virus and may buy time to get a vaccine in place. However, the down side is that they suggest that closing schools for 12 weeks might knock 6% off GDP. What they failed to mention is that huge numbers of workers in the health, power, transportation, banking and other vital industries will have to stay at home to look after young children. As for the teenagers, I can’t see them sitting in their bedrooms for 12 weeks in isolation. As soon as school is out they will get together with their mates and probably end up at the local shopping mall which is not going to stop the spread of the virus.
What I can say with certainty is that my bout of swine flu has led to us working out contingency measures for our business in a worse-case scenario, and other companies would be well-advised to do the same thing. Bacon sandwich, anyone?
Tags: GDP, swine flu, UK economy
Posted in GDP, swine flu | 1 Comment »
Friday, July 17th, 2009
The UN Conference on Trade and Development (Unctad) has just published its “Least Developed Countries Report 2009”, which looks at the world’s 49 poorest countries.
The report says the Least Developed Countries (LDCs) need to focus macroeconomic policy on building up both the productive capacity of their economies and infrastructure. Also, they need to ensure that their fledgling banking sectors lend towards productive activities rather than government portfolios and real estate.
Given the current crisis, LDCs will find it difficult to take corrective action of this nature and will still be dependent on Official development assistance (ODA). Although the report notes that this has often been wrongly directed in the past and has been used as a substitute for fiscal revenues. The report urges that ODA be maintained or even raised during the current crisis, with even more emphasis on debt relief, but that the aid should increasingly be used to bolster economic infrastructure whilst making it possible to raise more revenue through the domestic economy.
Unctad takes a swipe at the World Bank and IMF, who it maintains have, for the last three decades, encouraged LDCs to concentrate on using monetary policy to contain inflation, whilst ensuring fiscal policy keeps budget deficits at a moderate level. At the same time little emphasis has been placed on public investment as a vehicle to promote economic development.
The report argues that LDCs should now refocus their economic objectives to develop their productive capacities to produce more varied and sophisticated products. This will mean adopting expansionary fiscal policies and accommodating monetary policies, together with the maintenance of exchange rates and capital flows. Greater investment into agriculture and infrastructure as well as health and education will help draw in private investment and raise labour productivity, as well as combating poverty, generating employment, reducing inequality and diversifying economic structure.
How can states raise public investment to the necessary levels? They need to improve tax revenues which in 2000-2006 only rose marginally in LDCs to 12% of GDP, despite strong economic growth, which compares to tax takes of 30-60% in richer countries. The report calls for a halt on further trade liberalisation, an increase in tax on luxury goods, an improvement in the effectiveness of taxes on high incomes and corporations and a strengthening of property taxes.
Too much attention has been placed by LDCs on using monetary policy to reduce inflation. The report concedes that inflation has fallen, but that restrictive monetary policy has delivered high real interest rates on average, which has made much investment unviable.
In conclusion, the report suggests that LDCs manage their capital accounts to deal effectively with the two major problems of capital flight and short-term capital volatility. It also calls for managed exchange rate systems – such as a managed float or loose adjustable peg system – which would allow LDCs to maintain the competitiveness of their exports.
Tags: aid, exchange rate policy, IMF, Least developed countries, macroeconomic policy, monetary policy, Unctad, World Bank
Posted in Development, Ezine, Fiscal stimulus, International Monetary Fund, Low-income countries, World Bank, aid | No Comments »
Thursday, July 16th, 2009
Inflation in the sixteen countries making up the Euro area was -0.1% in June, which was down from 0.0% in May. Twelve months ago the inflation rate stood at 4.0%. In the wider EU27 annual inflation was 0.6% in June 2009, which was down from 0.8% in May. Twelve months earlier the figure was 4.3%.
There is still a large variation in rates between EU states. For example, in June, the lowest inflation rates were in Ireland (-2.2%) and Portugal (-1.1%) with the highest being Romania (5.9%), Poland (4.2%) and Lithuania (3.9%). The latest figure for the UK released this week is 1.8%.
The main components with the highest annual rates of inflation in June were alcohol and tobacco, miscellaneous goods and services and hotels and restaurants. The lowest rates were in transport, communications and housing. Hotels and restaurants saw an annual increase of inflation of 1.9% in the Euro area, but the French have already taken measures to boost their restaurant trade this month. They have reduced VAT on restaurant bills from an eye-watering 19.6% down to 5.5%. Unfortunately, for some of us, this reduction is only on the food and not on any alcohol consumed with the meal.
Eurostat has also released figures showing that industrial production grew by 0.5% in the Euro area in May compared to April, and by 0.1% in the EU27. This compares with a fall in production in both areas in April of 1.4% and 0.8% respectively. Looking at the past year as a whole, comparing May 2009 with May 2008, industrial production has declined by 17.0% in the Euro area and by 15.9% in the EU27.
Tags: EU, euro area, industrial production, Inflation
Posted in European Union, Inflation, eurozone, industrial production | No Comments »
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