Economic WhEEl In this issue: Austerity – good for Britain, bad for Greece! Low inflation – how good is that? I Want to Rule! The EU has been QE’d Russia – the bear might bite
Message from Ms Martin RE Economics Competition 1. “Countries like Greece caused the Eurozone crisis by running up too much debt, so it is only fair that they should bear most of the burden of fixing it." Discuss. 2. Should the Government support manufacturing? If so, how? 3. Should raising GDP be the primary objective of economic policy? 4. “The rising gap between rich and poor is not just bad for society, it is bad for growth." Discuss. 5. Should “fracking” be allowed? If so, who should benefit? 6. “It is immoral for the drug companies to charge large sums for drugs that are cheap to manufacture.” Discuss. 7. "High saving promotes faster growth. So having more savers in the global economy should be good for our long run prosperity." 8. “Does the economic case favour a new airport runway at Heathrow, Gatwick or elsewhere?” Essays should be between 1000 and 2500 words and are submitted online. The deadline is Tuesday 30 June 2015.
Is Osborne right about Austerity?
James Smith George Osborne to aiming for full employment. Whilst this does not mean 0%, a rate of 2-3% unemployment is acceptable and it is desirable for the economic benefits it brings. However, the economy may be close to full employment already, with a small output gap. This is a risky situation for the government to be in as they are in ‘limbo’ between investing in supply side policy to shift the AS curve, and achieving sustainable economic growth, or reducing the government deficit through austerity measures like reducing spending and increasing taxes. Austerity measures will reduce aggregate demand in the economy, and could widen the output gap, As employment increases there should be an increase in government revenue through higher tax receipts, enabling the government to spend more on public services, or alternatively to reduce the size of the deficit. However, if there is not a lot of spare capacity, the government could use increased tax revenue for infrastructure spending, which shifts the supply curve to the right. If this happened, productive efficiency would improve and there could be further stimulus from foreign direct investment (FDI). In addition to this the government wants to maintain low and stable inflation rates and this further conflicts with the aim of full employment if we are at, or near, full capacity.
LOW INFLATION FUELLING THE ECONOMY – OR IS IT? Source: http://www.bbc.co.uk/news/business-30493967
Maddy Johns
There’s good news for consumers across the UK as latest figures reveal an inflation rate of just 1% in November – the lowest rate in 12 years. By measuring the cost of basic household goods, the Consumer Prices Index (CPI) can attribute this news to plummeting prices of petrol – down 5.9% - and food – down 1.7%. Both sectors have a heavy weighting in the measure and this means that households across the country should see an increase in their disposable income. This means that sharp increases in consumption levels can be expected, boosting the country’s aggregate demand and ensuring short term growth. The UK’s long run growth, however, is less certain. The low inflation is set to continue and now that wages are finally keeping up with the inflation rate, wage spiral inflation is a near impossibility. While this is generally positive news, the current trend suggests a worrying move towards deflation in the near future. While inflation remains so low, increases in the Bank of England interest rates look further away than ever before. While that is sure to delight some, it is a worrying sign for many, as higher (but stable) interest rates are often a key indicator of an economy’s long term strength – a sign of households’ financial stability and a key source of finance for investing firms when savings levels rise.
Let me Rule!!! Odelia Sam
Nick Clegg, the leader of the Liberal Party has been pursuing greater social mobility for about five years in government. However, he will not be receiving the credit he should, as George Osborne is stealing the limelight. George Osborne has a record for setting unrealistic targets. At the Royal Economic Society’s annual lecture at the Bank of England he set another target which is unlikely to be met. He wants Britain to be the richest major economy in the world by 2030. He thinks he can sort out Britain’s endemically low productivity level. However, this issue is a structural one and Britain’s low productivity cannot be cured overnight. Britain’s educational attainment levels lag behind other countries and if this was an easy target, we could, for once, be on the way to achieving one of Osborne’s targets. But there seems to be a divide in Britain in terms education, where we have the elite graduates from grammar schools and elite universities on the one hand, and graduates from state schools on the other. We seem to have better elite schools than our rivals, but this is balanced out by Britain’s ‘inadequate’ schools. There are too many of them. If this situation persists, and we don’t get more social mobility, then some economists believe this could lead to economic suicide. Instead of elites like David Cameron leading us, the country could be run by ‘normal’ people, like me, and some you reading this!
Beware the Russian Bear – he might bite!
Tunmise Russia is increasing its interest rates from 10% to 17 % in order to try and steady the markets. The problem is that inflation is already 10%, so the net effect of the increase is a ‘real’ rate of 7%. This is against the backdrop of a fall in oil prices from $120 to around $50. As an exporter, Russia is highly dependent on oil revenue for government spending Sam Jones: Discovery of oil in America is partly behind the oil price collapse. The fracking process has meant that there is a glut of oil in the market. OPEC would normally respond by reducing output, but to date, this has not happened. Russia may blame the sanctions from Europe and America for this. The sanctions were imposed when Ukraine was invaded, but they have always been seen as a minor influence on Russia, and the operation of markets, increasing the supply of oil and depressing its price, may be more significant. The increase in Russian interest rates to 17% will cause the aggregate demand curve to shift to the left and RGDP will fall. This is because consumption and investment, both components of aggregate demand, will fall and there could even be a multiplier effect.
Andrew – The Rouble has also fallen in value by 50% in the last twelve months. This could be a serious problem for Russia. Russia should have diversified its economy when it had the opportunity. It could have moved from primary production to secondary and even tertiary production, but this has not happened. I agree that aggregate demand will shift to the left as a result of the increase in interest rates. Consumption and investment will drop due to there being less disposable income for households with debts and mortgages and lower profits for firms with business loans. Russia does not have much alternative, as it must address the fall in the value of the Rouble and monetary policy is the most effective in terms reducing inflationary pressure.
Liiza Tu Russia’s economy has been slowing down since 2012 and capital outflows have reached $128 bn. Some leading banks are unable to raise mid-to-long term financing outside Russia. There is a $200bn debt for Russia, and around $100bn will have to be repaid in 2015. Against this, Russia’ export receipts have declined by $140bn. As well as the fall in aggregate demand, a fall in investment due to high interest rates will also be likely to shift the aggregate supply curve to the left. Nadia Uddin: The rouble has lost half its value this year and this is feeding through to prices. Russia’s inflation is caused by the weaker rouble, higher food prices and western sanctions. Russia’s economy was slowing down in 2012 and was already on the verge of recession. Russia’s economy needs to diversify toward manufacture and tertiary services. The fall in the value of the Rouble is behind the increase in inflation.
Is Austerity OK for Britain? Students were asked what they thought of the following graph, which outlines the nature of public spending in the UK. Where would they make cuts or increase taxes to achieve a budget surplus by 2019?
Andrew: We need to reduce the budget deficit by reducing spending and increasing income. To reduce spending we should cut social protection as it is already at ÂŁ200 billion per annum. Also, corporation tax should be cut further to encourage investment. This should mean more jobs and more internationally competitive goods. Excise duties should also be increased to increase tax revenue. Extra tax on cigarettes and alcohol will discourage people from smoking and drinking and this should reduce health care spending. Other contributors: The government should reduce the amount being borrowed (ÂŁ80 billion pa right now) and cuts in defence spending should be the main policy.
From another student: Trident should not be cut. We do not spend enough on the military as it is. Instead, we should cut social protection 25% (50 bn) and and use that money to pay off our debt and increase military spending etc. Another student: Mr Osbourne is right to pursue austerity measures. He should go ahead with the plan to have a budget surplus by 2019. He has already missed a number of targets, and this has dented his credibility, but recent reports from the IMF and the OECD say that he is doing the right thing. Anon: Increase National Insurance (14 bn) as people may see it as saving for their own future. Cut social protection by £30bn. Privatise sport and cut Aid and Culture by 9bn Dhiraj: Cut government spending: Defence by £15bn, Education by £9bn, Transport £5bn, Health Service £15bn, Public Order £3bn, Housing £2bn, Industry etc £2bn, Social Protection £15bn, Aid, Sport, Culture, £15bn. Andrew: We need to reduce the budget deficit by reducing government spending. Social protection should be cut, as it is too high at £200bn. Corporation tax should also be cut to encourage investment. This would lead to more consumption through there being more jobs, and could lead to more internationally competitive goods. Trident should not be cut. We do not spend enough on military as it is. Excise duty on cigarettes and tobacco could also be increased. This would discourage people from smoking and drinking alcohol and could ultimately reduce spending on healthcare. Felix: Increase VAT to 25%. Put up council tax by 15% and increase stamp duty by 10%. Cut the Defence budget by 10bn, Social Services by 10bn, social protection by 10bn and end all Aid, Sport and Culture spending.
It’s all Greek to me. Harris Chafford Hundred Academy students assess the difference between Greek Austerity and UK Austerity.
Alexis Tsipras, Prime Minister of Greece since January 2015. Austerity is the process by which the economy either reduces government spending or increases taxation (or both) in order to achieve a budget balance or to pay off the national debt. Greece has large debts with the EU, and it has had comparatively high minimum wage levels and generous pension provision. They will have to make cuts in these and the troika of the ECB, the IMF and the World Bank have insisted on necessary reforms. Because the UK has its own currency it is able to allow devaluation, as happened in 2008/9. This makes exports more competitive and imports more expensive. So austerity in the UK has not been as severe as in Greece, which as part of the Eurozone does not have the option to devalue. Instead, it has had to suffer internal devaluation, leading to internal economic adjustment with falling prices, lower wages and higher unemployment. Austerity in Greece has meant further government borrowing on international markets is more expensive, as there is more risk involved. This has affect consumption and investment and shifted the AD curve to the left. Lack of investment and the fall in consumer confidence has meant that the economy has shrunk at lower price levels and lower RGDP. Overall, I think that in the long term the EU will benefit from Greece leaving the Eurozone. If Greece leave they may thrive due to lack of debt obligations and become a cheap holiday destination once more. However, this may encourage other southern countries in Europe to do the same, among them Spain, Portugal and Italy, thereby creating a divide between north and south. From a second student: Greek austerity policy is damaging the Greek economy and has brought the country to its knees. My AS/AD diagram shows both the AD and AS curves shifting to the left, indicating the economy has shrunk. Characteristics of Greece do little to improve the situation – it is typified by high levels of corruption and a big public sector and this significantly hampers Greece’s ability to rescue the economy.
Greece differs from the UK, which also had a downturn. The UK was able to devalue the currency and had its own central bank to control inflation and control interest rates. Greece cannot do this as its interest rates are controlled by the European Central Bank. As there are many other economies in the Eurozone, there is no option but for an internal devaluation leading to a cut in jobs and wages. This in turn causes government revenue to fall and this further hinders the ability to pay back debts to the EU. If Greece was to leave the EU and default it could cause contagion which could lead to other poor performing economies to follow suit and also exit from the EU, among them, Italy, Portugal and Spain.
From James: Greek GDP is 25% lower than in 2008 and there is 25% unemployment. 60% of that unemployment is made up of young people. Austerity is therefore very difficult for the Greek people.
To QE or not to QE – that is the Question James Today we are looking at the Quantitative Easing policy recently announced by the ECB.
Countries in the EU: UK, France, Germany, Netherlands, Belgium, Portugal, Italy, Spain, Norway, Sweden, Switzerland, Finland, Poland, Luxembourg, Romania, Austria, Denmark, Hungary and Bulgaria. QE is basically loose monetary policy. Through a process of giving banks the money to buy bonds, the price of the bonds is driven up and the interest it bears falls in proportion to the value of the bond. The idea is that banks will be more likely to lend, particularly to businesses. There is still a great deal of dispute as to how effective QE is, but the markets tend to like it…. The UK and USA have increased made asset purchases of around 25% of GDP through QE. The EU’s programme is for about 5%, so it is small by comparison.
The following is the embed code for UK’s economics debt clock – now running to almost £1.5 trillion. <div style="width: 250px; height: 210px; text-align: center;"><script src="http://www.debtbombshell.com/widget/embed.js" type="text/javascript"></script><a style="display: block; margin-top: 0px; font: 9px Arial, sans-serif; font-weight:bold; text-decoration: none;" href="http://www.debtbombshell.com/">UK National Debt Clock DebtBombshell</a></div><br />