In this Issue:
The UK Deficit Time is ticking for HS2…. Rising Income Inequality in the US Euro to spread to Poland LITHUAINA REJECTS RUSSIA’S GAS SUPPLY Russia tells Ukraine to PAY! Wind Farm Folly Corruption and FDI IMF is WRONG Independence Breaks Out Corruption and FDI German Warning Shot Link
The deficit of the UK economy In the last 5 years the UK economy has seen the deficit cut from £157 billion to £108 billion. Despite this cut the deficit still remains high. This is in part because wages are not growing and we have a huge welfare bill. Since 2008, wages have not recovered and this has meant the government are receiving less tax revenue. Until the wage situation is resolved the UK government will have to continue to borrow large amounts of money and have a high deficit. As the deficit is still high the government will struggle to meet the promise they have given: to be able to cut taxes. Taxes will need to remain at the current level to decrease the deficit and maybe meet the target that George Osborne set.
A decision needs to be made whether to increase taxes or cut welfare to meet the predicted budget surplus by 2019. SAMUEL JONES
Felix Ideah
Deficit? What Deficit? This has been a problem for the UK government recently. The OBR (Office for Budget Responsibility) has made an assessment that George Osborne (the Chancellor) will miss his target for the deficit in the 2014/15 financial year. This is reinforced by the fact that the Government’s borrowing will be 10% higher than in the last financial year. The deficit, which is yearly borrowing, is different to the debt, which is the accumulation of all debt. At some stage in the next Parliament, Osborn plans to reach a surplus. The deficit has fallen since the 2009/2010 financial year when Labour were in power, from £157 billion to £108 billion. Luke Hucker The Deficit • • •
UK government can’t get its deficit down, it’s too high George Osborn will once again miss his target for the deficit in 2014/15 Size of deficit fallen from £157 bn in 2009/10 to £108 bn in 2013/14
All of this limits the ability of the government to deliver tax cuts that they promised to give before the general election; therefore, the current government may lose out in the general election as a result. This is because output has recovered strongly but earnings have not.
Time is ticking for HS2…. Aryan Ayerman
The HS2 high-‐speed rail project is "essential" for the UK's future and the potential gains "significantly outweigh" any risks, MPs have said. HS2 would cut journey times between London, the Midlands and the north of England. The first phase, from London to Birmingham, is due for completion in 2026, with a second Y-‐shaped section from Birmingham to Manchester and Leeds due to be finished in 2032-‐33 The Commons Transport Committee also had the estimated cost of £5bn. The cost of the project in its entirety is estimated at £42.6bn, with £7.5bn needed for the high-‐speed trains. Of the £42.6bn, a total of £14.56bn is contingency. But its support for HS2 "was not unqualified", the committee added, saying it remained concerned about how Heathrow would be incorporated into phase one and what impact including a stop at the airport would have on the budget.
Rising Income Inequality in the US Janet Yellen, the Federal Reserve Chair, speaks about her concerns on economic inequality at the Federal Reserve Bank of Boston Economic Conference.
In a speech, Janet said that by strengthening the four pillars of economic opportunity (resources available to children; affordable higher education; private business ownership; and family inheritance among low and middle income earners), the wealth gap to narrow. She noted that the distribution of income and wealth has widened in the U.S in several decades abd to a greater extent than most advanced countries. The graph shows that there is an increase in the percentage of U.S income inequality. This also shows that in 2010, there are more people who are reaching the top income groups; the top 1% soaring to 20% of GDP as opposed to 7% in 1774. The question we should all ask, is whether this process also applies to the UK? Liiza Tu
Euro to spread to Poland Courtney, Amelia and Sana
A new survey shockingly shows that the vast majority of Polish people are against joining the Eurozone. The reason this is shocking is that the countries’ president, Bronislaw Komorowski, strongly supports Poland adopting the Euro. In addition Komorowski said that a decision would have to be made following the 2015 general election. The reason for this is due to the terms of its EU memebership which Poland acceded to in 2004. With a large 70% disagreeing to joining the Euro, the reasons for this become apparent. Firstly, if Poland were to join the euro they would no longer have the freedom to change interest rates. This can be crucial to balancing the economy when in financial difficulties. Not only does Poland loose their power to change elements of the economy of their country but they also loose a large majority of their overall power. With many larger countries such as Germany playing a large role in sustaining the Euro, Poland would have little influence in the euro area . However there are positives to Poland joining the euro This is the financial support that they would get from other countries. With other countries being able to support the euro, Poland even if in financial difficulty, might be better off.
LITHUAINA REJECTS RUSSIA’S GAS SUPPLY
Lithuania is becoming more economically independent from Russia as it is now starting to use its own gas supply. The Lithuanian President is looking forward to this as Russia can no longer dictate Lithuanian politics and they no longer have to pay inflated prices for oil. This will allow Lithuania to have more control of their economy. President Dalia Grybauskaite said “For us this would give us a lot of leverage and freedom in decision making.” This shows Lithuania is looking forward to the development of their gas supplies. In 2015 the country’s first liquefied natural gas terminal will open. This has a number of advantages for the Lithuanian economy. For example there will be an increase in employment, as a number of job will become available as a result of the creation of the gas terminal.
Lithuania will be able to export the gas to surrounding counties e.g. Latvia and Estonia. This means the gas terminal will help to increase economic growth in Lithuania. This is due to
Lithuania’s exports increasing (so aggregate demand increases). The demand curve would shift to the right if government spending finances the terminal, and since this is infra-‐ structure spending, the supply curve would also move to the right. As the graph shows the growth from AD to AD1 causes increased economic growth from Y1 to Y3. This will not be good for the Russian economy as it will be losing the profit from gas exported to Lithuania. Also, if Lithuania separates further from Russia then other countries may follow, which would further damage Russia’s economy. Shivani & Cody
Russia tells Ukraine to PAY!
Natural gas production declined after 1975, and a similar pattern of growth and exhaustion occurred with Ukraine’s petroleum, ultimately making the republic a net importer of these fuels. The pipelines connecting the Siberian oil and gas fields with Europe are a major economic asset for Ukraine, as their importance to Russia gives Ukraine leverage in negotiations over oil and gas imports. However, disputes between Ukraine and Russia have in the past led the latter to cut off its supply temporarily—negatively affecting Ukraine as well as the EU, which depends on gas and oil from these pipelines. Russia’s state –run energy giant Gazprom is seeking pre-‐payment for gas deliveries to Ukraine. Russia’s energy minister Alexander Novak thinks Ukraine should be able to pay off its outstanding gas bill within a week. Ukraine, Russia and the European Union closed their discussion without agreeing on a deal this week (Novemeber). Moscow and Kiev were not able to agree on when Ukraine should pay for the gas deliveries and the amount of gas which should be delivered. Ukraine failed to convince Russia that it could pay in advance for gas to be supplied over the coming winter months. Ukraine and Russia managed to agree on a price of $240 per billion cubic metres, however the talk was stopped as they were unable to move past another issue which was where Ukraine will get the money from in order to pay for the gas supplies in November and December.
The European Union, Russia and Ukraine are hoping to resolve the argument over the price that Kiev has to pay for gas. Russia increased the price it charged Ukraine for gas after annexing the Black sea peninsula of Crimea from its neighbour in March. Anisa Connie Adds: Russia’s energy giant, Gazprom, is seeking pre-‐payment of gas deliveries to Ukraine. Russia’a energy minister thinks Ukraine should be able to pay off its outstanding gas bill with a week. Ukraine, Russia, and the European Union closed their discussion without agreeing a deal this week. Moscow and Live were not able to agree on when Ukraine should pay for gas deliveries and the amount of gas which should be delivered. Ukraine was unable to convince Rusia that it could pay in advance for gas to be supplied over the coming winter months. Ukraine and Russia managed to agree a price of $240 per billion cubic meters but talks were suspended as Ukraine could not guarantee payments in November and December. Ukraine, Russia, and the European Union are hoping to resolve the argument over the price that Kiev pays for gas. Russia increased the price it charged Ukraine for gas after annexing the Black Sea peninsula of Crimea from it’s neighbour in March.
The Great Ukrainian Freeze According to Russia’s Energy Minister Alexander Novak, Ukraine should be able to pay off its outstanding gas bill soon. Russia and Ukraine have yet to agree on when Ukraine will pay for gas and how much will be delivered. Russia is also not convinced that Ukraine can afford to pay for the gas in advance for the winter months. Even though a price of £240 per billion cubic metres has been set, Russia does not believe that Ukraine cannot pay the price. Ukraine’s government has refused to pay this inflated cost so far, however Kiev has asked the EU for another £1.6Bn in credit in order to decrease the pressure on the Ukrainian government. Ukraine’s current unwillingness to pay the extra price has caused the Russian economy to slow down. This and the 25% drop in the price of oil since June, has caused other members of the Caucasus and Central Asia Region (CCA), which includes a number of former Soviet states, to also see their economic growth slow down by 0.75% as a result. The slump in oil prices has also caused other members of OPEC to experience a reduction in economic growth. For example, Kazakhstan’s GDP grew by 6% in 2013 however in 2014 this has fallen to 4.6%. Rahim Miah and Jake Hall
Tension in Ukraine Russia’s slowdown in terms of economic performance has been disappointing, and this has also impacted on regions which trade with Russia.
Since Russia annexed Crimea, taking it from Ukraine, it has had sanctions imposed from Europe and the United States. These target certain individuals, firms and certain sector’s of the Russian economy. This will impact on the confidence of firms and households and could affect economic growth. Ukraine are facing demands from Russia to pay off their outstanding bill or Russia will cut off the gas supply.. Ukraine are vulnerable because they need to look elsewhere for supply. Storage is an issue, and it is hugely expensive to build. The easier option is for Ukraine to ask the European Union for an extra 2 billion euros on top of the current bail out. Panshe Nicucro
Wind Farm ‘Folly’ Homeowners face increasing electricity bills up to £1000, which is almost double the amount of electricity bills paid by households. By 2030 it will cost £26 billion for homes – a 53% increase in the average consumer power bill. The cost of renewable energy and carbon taxes will put an extra £983 a year on household bills by then, compared to relying in a mix of nuclear and new gas-‐fired power stations. Using renewable energy means that in times of high demand, such as during very cold weather, Britain would be at risk of power cuts. “This has brought the country to a position where power cuts could become a regular feature of cold winters for several years.” – Sir Donald Miller, former chairman of Scottish Power. By September 2014, the UK government installed 3 500 new wind turbines which supplied 4 gigawatts of energy. CEO of Renewable UK believes, “this record shows that wind energy is providing a reliable, secure supply of electricity to an ever-‐growing number of British homes and businesses” and gradually in the long-‐term this “free resource will help drive down energy bills”. However, the German government warns the UK government about going down this chaotic path of renewable energy. Germany has recently been discovering the problems which wind power has over a long period of time. Similarly to the UK, Germany also installed new wind turbines, and they installed 23 000 wind turbines as well as millions of solar panels, which supplied 31 gigawatts output. Today, Germany faces two major technical issues. One is that it is incredibly difficult to maintain a consistent supply of power to the grid, when the output of renewable energy sources are constantly fluctuating compared to the more balanced conventional power stations. Secondly, to keep back-‐up constantly available, it requires fossil fuel power plants to run much of the time, which is ineffective and expensive. As a result, the German government has to pour hundreds of billions of Euros in subsidies into wind and solar power. Nadia Uddin Morgan White Shannice Tapper-‐Gregory
Corruption and FDI Dhiraj Kormocha
The surge in foreign direct investment (FDI) flows during the 1990s has motivated a host of recent studies into their determinants. Recently, the level of corruption in the host country has been introduced as one factor among the determinants of FDI location. From a theoretical viewpoint, corruption is the payment of bribes to corrupt government bureaucrats to get favour’s such as permits, investment licenses, tax assessments and police protection—is generally viewed as an additional cost of doing business or a tax on profits. As a result, corruption can be expected to decrease the expected profitability of investment projects. Investors will therefore take the level of corruption in a host country into account in making decisions to invest abroad. In a survey of international business managers the costs of investing in a more corrupt host country were shown to be as much as 20% higher than those of a less corrupt one. By this line of reasoning corruption in a host country will increase the costs of foreign investors and will hence discourage FDI. Corruption in the political system is a serious threat to foreign direct investment. Letting people take positions of power through bribes rather than ability will produce instability into the political process will distort the economic and financial environment. This instability can lead to a decrease in profit from invested projects. This will tarnish the perception of a country’s stability and the quality of investment potential and will discourage future potential FDI. However some argue corruption is not too harmful because bribery can speed up the process and help avoid bureaucratic inefficiency.
The IMF is WRONG The IMF (the International Monetary Fund) is recommending a huge surge in infra structure spending for the Eurozone , but this type of investment is not necessarily the cure. There is evidence of over investment in infrastructure in Spain, Portugal, Ireland and France. It may be more appropriate to work on other supply side factors to improve the Euro economy. The UK and the USA seem to have weathered the recession, but it remains to be seen whether they, too will benefit from further borrowing for infra structure projects. Charlie Simmonds
Independence Breaks Out Maddy Johns Scotland may have fallen at the final hurdle, but the independence movement is still growing strong across Europe. The Catalan region in Spain may be the next big focus on the world stage, and parts of Eastern Europe may follow. Over in Lithuania, the fight is over gas, against a formidable opponent: Russia. Long associated with tycoons and their endless bank accounts, the Baltic country has finally taken a stand against the Russian energy giant, Gazprom. ‘Nobody will force us to pay the political price!’ Valia Grybauskaite. President From 2015 the first Liquified Natural Gas (LNG) terminal in Lithuania will begin operations – a move that will end over-‐reliance on Russian gas. As a result, they will be able to distance themselves from the political turmoil and economic sanctions that have resulted in conflict between Russia and Ukraine. The recent doubling of the Gazprom price for Ukraine is clear evidence that the new terminal is a step in the right direction. Meanwhile in Poland, there is a cry for independence from the Euro. They want to keep the Zloty. 76% of a sample poll said they did not want the Euro. Monetary union is a requirement of EU membership, the Polish are worried about this. Who can blame them? The Greek crisis is hardly a glowing advert for the Eurozone, and indeed it seems dangerously unstable. New Prime Minister, Ewa Kopacz recently shared her aspiration of a ‘strengthened Eurozone and a stable economy’. With the two ideas so far from being compatible in the the governing party, Civic Platform, are right to tread with caution. The decision must be made after the 2015 General Election and until then, Poland should focus on maintaining their impressive 3.3% GDP growth. Stand-‐out figures like these make the case for Poland’s strength in monetary sovereignty – and long may it continue.
German Warning Shot
Edward Haigh German Chancellor Angela Merkel came under fire from her advisors when she decided to lower forecasts of economic growth from 1.9% to 1.2%. Reports indicated the German economic recovery would be short-‐lived and Germany would re-‐enter recession. The head of the Economic Advisory Group in Germany has stated that future increases in pensions and introduction of the minimum wage would prove a warning shot to the recovery. Angela Merkel has denied these claims though and states that the reforms have not yet been implemented, and so cannot be the cause of a slowdown. Instead, she blames the global economic slowdown and crises in the Ukraine and the middle east.