France pays the price for not reforming

There is one consolation for the UK in the recession. It is worse in France.

The French government have just issued their latest budget proposals. This is against a background of three quarters of recession and unemployment of 10.2%. Also the French government budget deficit is significantly higher than it needs to be to meet Euro area rules.

So the French are proposing a 75% tax rate for the really high earners. There is also a new 45% tax rate for those earning more than £120k.

This has an obvious effect on income distribution and that suits the new socialist administration (the LibDem's have similar ideas in the UK). But many say that the French have again missed the point.

The French have resisted making the supply-side reforms which have helped other economies, like the UK, adjust working conditions in the face of the crisis. French employment law continues to discourage firms from employing staff on a permanent basis and raises the cost of employment further beyond the wage rate making employing staff expensive.

The rise in profit taxes makes the prospects for employment worse not better.

The French are caught in a difficult situation. They want to help ease the recession and help the poor and unemployed, but they are finding it hard to make the tough decisions.

The Independent covers the new French budget here

The problem of measuring

Deps have already encountered the issue of measuring GDP. There are plenty of reasons to suppose it is not an exact science.

Today the GDP figures for the April - June period (the second Quarter) were revised for a second time. It was good news as the fall in GDP was less than previously reported meaning the recession is not as bad as was thought.

The article explains some reasons why the figures reported originally were wrong

The BBC explain the change here

Supply shock pushes market price up

In an unfortunate turn of events Olive Oil prices are set to rise by 25% or more.

The cause is a fall in the olive crop in Spain. The problem is two supply shocks which have reduced the quantity and quality of the crop.

First there was a frost when the olive trees were flowering, which meant less crop. Then there was a drought over the summer (the rain fell on the UK) and this means lower quality fruit with less 'juice' to turn into olive oil.

The effect is that the supply of olive oil is lower, shifting the supply curve to the left. The market price will rise and everyone will have to pay more for their olive oil. The full extent of the change will depend on the elasticity of demand.

If there is an upside it is that Greece will get more for their olive oil and they produced a normal crop.

The Guardian covers the story here

A new initiative on an admission of failure

The political conference season always brings some populist policy announcements. So Vince Cable has provided the embattled LibDem's with one to try and cheer them up (they currently lag UKIP in the polls).

The idea is unusual in the sense that it is the fourth of its type and two of previous ones were also announced this year. Essentially it is another attempt to help businesses borrow funds and so grow.

Leaving aside the previous, presumably inadequate, measures this one involves a new government owned bank. It will have £1bn of public money and some private sector money. It hopes to help small and medium sized businesses to borrow long term (around 10 years).

The problem, as before, is that the high street banks (such as Lloyd's and HSBC) are short of cash and risk averse. They are reluctant to lend to small and medium size businesses long term and so these firms cannot undertake new projects that take years to repay their investment.

The aim is to provide greater certainty.

Certainty for the high street banks - they can pass loans on to this new 'CableBank' and remove the risk from their balance sheets. In this case they will be much happier to agree long term loans as they remove the risk of default.

Certainty for small and medium sized businesses as they can borrow at an agreed rate for a period that makes investing safer. No firm wants to have the risk of losing their funding or seeing a hike in interest rates part way through an expansion.

So overall this will help? Like all supply-side policies it will take time to work. It will be 18 months before this bank can start operating and then more time before enough loans can be made to really make a difference. If the economy isn't growing by then nothing may help!

The BBC report the scheme here and there is a link to Robert Peston's blog where he doubts its effectiveness

Road pricing 'inevitable'

Ever since I started teaching Transport Economics in 1995 road pricing has seen to be 'about 10 years away'. It is a sensible move that will allow better management of the road space we have, allow the economy to function more efficiently and help reduce greenhouse gas emissions. So its still '10 years away'.

Now Transport Minister Normal Baker says it is inevitable. Not for environmental reasons, but because the move away from carbon based fuels will reduce government revenue from excise duties on fuel! The government can't afford that.

As a consequence the road fund licence (the tax disc) will also be scrapped and people will find themselves charged according to the distance travelled, via GPS technology. Hopefully there will be a scheme that charges 'by the time of day and level of congestion' rather than simple tolls.  

The details of Minister Baker's ideas and some commentary is in the Sunday Express. Who would have thought we would ever look there?

The Express article is here

Public debt rising

The government wanted to reduce the level of annual government borrowing (the public sector borrowing requirement - PSBR) and reduce the proportion of government debt to GDP.

Last month the government borrowed £14.4 billion, well above the projections of the recent budget let alone the 2010 budget plan.

It now seems certain that the government will not meet its debt reduction or deficit reduction targets. But is this really important.

The arguments for deficit reduction are based on reducing the tax burden on the economy and keeping borrowing costs low (for example in Greece all borrowers pay very high interest rates because of the Greek governments excessive debts). That will aid long term growth.

The reason why the Governor of the Bank of England says it is okay to miss the debt targets is because of low growth world wide. If the world does not grow then the UK is unlikely to grow very quickly either. Therefore tax revenues are lower than expected and government spending is higher (on benefits for example).

Some people say that the government should spend even more to boost short-run growth. The same people ridicule the overshooting of the debt target. Am I the only one who finds that odd?

The Guardian explains the debt situation here

Lack of information goods - Pensions

A market can only work efficiently if both sides of the market (buyers and sellers) have all the information they need. Therefore a common market failure is where one side of the market has insufficient information or places too little value on that information.

Pensions are an excellent example. Many people do not save enough for retirement because they do not fully understand the benefits. This makes them look on pensions as too expensive and they decide not to 'consume' that service.

The problem with pensions is that the benefits are a long way into the future when you are in your 20's. When you realise that you need a pension it is too late to build up one you are satisfied with.

So the solution is to make pensions more attractive. Until now the government has given a tax incentive to those contributing to pension schemes. All contributions are 'tax free' saving 20% of the cost and up to 40% for higher rate tax payers.

Despite this generous incentive the number of people in private pension schemes has dropped below 3 million for the first time. (There are around 5 million in public sector schemes.) With 29 million people in work this means around 21 million workers in the UK have no private pension.

Of course the state will pay everyone an old age pension and there is a state earnings related pension, but this may not be enough to let people live comfortably. If that happens the government will end up paying out more benefits in other forms and with an ageing population they can't afford that.

So a new scheme is being introduced. All employers will have to offer a workplace pension and all workers will have to opt out of their workplace schemes. It is hoped that the effort of having to do so will mean many people will get a private pension by default.

This is an example of regulation and looks like being more successful than the market solution of tax rebates (although that remains too).

The Independent reports the scheme here

Inflation moderates, but head and tail winds continue

Inflation, as measured by the CPI, fell to 2.5% last month, that's down from 2.6%. This is still above the target rate of 2%, but it means inflation is going in the right direction.

There are always competing forces on the inflation rate. Some prices are rising and pushing the index up, others are falling and putting downward pressure on inflation. (Known as headwinds and tailwinds since a speech by the Governor of the Bank of England.)

Presently it is believed that inflation will fall towards target, despite factors such as higher food prices, because of weak demand in the economy generally. It is always difficult to be exact.

The BBC cover the figures here.

Look at the economy tracker for the data and maybe look at the personal inflation calculator

The Bristol Pound - isn't it just a gimmick?

Bristol is the first major city (their words) to launch their own currency. Some towns have already done this, such as Stroud, just half an hour north.

'The Bristol pound' can be exchanged in participating retailers and accounts can be set up with the Bristol Credit Union. So it works just like normal money.

The aim is to try to encourage 'local trade' and to prevent spending from 'leaking' out of the area when spent. According to their website:

What is the Bristol Pound

The Bristol Pound is a complementary local currency designed to support Bristol’s independent businesses, strengthen the local economy, keep our high streets diverse and distinct, and help build stronger communities.
The Bristol Pound is the UK’s first city wide local currency, the first to have electronic accounts managed by a regulated financial institution, and the first that can be used to pay some local taxes.

Well that's fair enough, but is it in any sense a real currency and can it achieve their goals?
The exchange rate if £1 to One Bristol pound (surely it should be called a 'Brizzol') means that it is in a currency union with the UK and so is subject to all the vagaries of the UK economy and UK monetary policy.

Maybe there will be a stronger local multiplier effect. But to achieve anything it must be widely accepted in settlement of debt and as a medium of exchange. For that to happen a large proportion of businesses will have to accept it, including national chains. These large businesses will then simply exchange their 'Brizzols' for real pounds and the money leaks away.

The advance of the Brizzol over other local currencies is that they can be exchanged electronically. But it seems little more than an interesting gimmick that falls into the category of regional marketing rather than economics.

See what you think at their website here

A supply-side reverse?

Today some details emerged about the scrapping of GCSE's and their replacement by a new exam.

The aim is to make the exam 'tougher' by which I presume they mean that the material examined will be more advanced. Some believe that it just means the exam will offer fewer pass grades and the format, a single three hour paper, is less user friendly.  (Languages and science subjects will have some interesting problems with that format.)

The question for economists is, will this raise educational standards and so make the workforce more capable? If the answer is yes then the capacity of the economy will increase and the prospect of a more competitive and faster growing economy is in prospect (in about twenty years time it should really kick in!)

But for most educators it is a huge step backwards which will exclude the less able and those not so good at three hour exams which would include many of the most able.

Further there is a huge missed opportunity. Everyone will  be compelled to stay in education until 18 when the new exams begin in 2015. So why is there a 16 year olds exam at all? Why not concentrate on education rather than hoop-jumping and have exams at 17 and 18.

Some will say that the Education Secretary has no grasp of modern education and is a throwback to an earlier age. Neanderthal.

The BBC cover the story here