Economics magazine - February 2023 issue

Why house prices are falling in the uK

Ted & raj

There are many reasons for the imminent fall in house prices in our country. For the last ten years we have seen nothing but growth in the average value of a British home, however it seems this trend is soon going to stop. Reasons vary from long term effects which have been compounded over the last ten years as well as short term shocks which have had an immediate effect on the demand for UK homes.

The sudden shocks to the market first came with changes to interest rates in the last year. As a country we have had over ten years of rates being at an all-time low of 0.5%, leading many people to take out large loans to finance their dream home, as mortgages were so cheap. Now however with rates rising to 3.5%, financing your dream home is much dearer, leading to many not being able to afford mortgages, in turn decreasing demand for homes. This shock was compounded by the infamous 44 day tenure of Liz Truss. Her economic policies were so abrupt they caused mass panic across all markets. This level of uncertainty greatly affected the mortgage market, as banks were not able to confidently predict what would happen to the country’s economy, meaning they couldn’t risk providing mortgages as they didn’t have the confidence they would be paid back. This led to major

lenders pulling mortgage offers, meaning people couldn’t buy homes and therefore decreasing their value. This major loss of confidence in the economy and the increased price of lending means people can not buy homes now causing prices to fall. In the long term, there has always been the risk of a crash as house prices are simply too expensive. It seems that rising prices haven’t been matched by rising incomes meaning that more and more people can’t afford to buy a home. The average age of first-time buyers is rising showing that a crash is needed to stabilise the market, especially given the fact that prices have increased a record 10.2% in the last year. This has all contributed to the eventual crash in prices. The question is what this will mean for the market and country?

The costs of falling house prices for the UK economy are extensive, the most prominent being its effect on consumer spending. When house prices fall, homeowners experience a negative wealth effect. This means a consumer’s stock of assets (in this case their house) have fallen in value and as a result they feel less confident. People are therefore more likely to cut down on spending and hold off from making personal investments.

This fall in expenditure sets off a chain reaction. Initially there will be

lower demand for goods and services in the UK, leading to firms lowering their prices and decreasing supply. As the UK economy is now producing less goods, economic growth will decline, and more uncertainty will arise. Firms will also be making less revenue which means, to save money, they may begin to lay off workers, increasing unemployment in the country. Ultimately the economy will contract and plunge into recession.  Despite the dire consequences, a few less significant benefits could be argued to occur as a result of the crash. Years of rising house prices have caused a large disparity in the distribution of wealth between the young and the old, as previously it was possible to afford a decent property on an average salary. A fall in house prices could make a firsttime purchase more accessible to the young and therefore, in the long term, reduce the wealth gap.  Moreover, from a broad perspective of the economy, it is unhelpful for so much of the UK’s wealth to be locked up in stagnant property. If we were to invest the money in productive capital instead, there would be a significant increase in economic growth in the long term. However, we believe it is reductive to think that a fall in house prices will solve deep rooted issues, and instead it will cause significant problems for the UK.

House price to earnings ratio (FTB)

The uK Hospitality Sector's Struggle to recruit Staff After Brexit & CovID-19

Sarah

During the Coronavirus lockdowns in 2020, the UK hospitality sector grounded to a halt as cafes, restaurants and hotels were forced to shut. This gave businesses no choice but to furlough workers or make them redundant. The estimated 600,000 redundant workers moved to other industries, left the UK, or retired. Training programmes were also paused, which cut the flow of new skilled individuals entering the labour market. As a result, when businesses reopened there was a severe struggle to recruit new staff, in particular cleaners, front of house and waitstaff.

Additionally, Brexit saw an end to the free movement rules of the EU, meaning EU citizens no longer have the right to live and work in the UK

without permission. Instead, they must obtain a visa, which is only available for middle to high skilled workers applying for a job earning over £25,600. This has forced 197,000 international workers to leave the UK since 2019. The hospitality sector was worst hit losing 46% of its workers from the EU, which used to make up 40% of its workforce. An estimated 89% of businesses have been dissuaded from hiring overseas workers, due to the tougher immigration rules imposed. In April 2022 UK employment was 0.9% below pre-COVID levels and job vacancies were at a record high of 1.3 million, reflecting businesses struggle to recruit. In particular, the hospitality sector has 174,000 vacancies.

This has had a tough effect on businesses, with 43% having to cut trading hours or close for certain days due to staff shortages. The lost revenue is valued at an estimated £21 billion due to unmet demand, while £5 billion has been lost in tax revenues. Some businesses have risen wages by 22% in order to attract staff from the highly competitive labour market, while others have invested in staff welfare, embraced flexible working and introduced bonuses. This comes at a time where firms are also facing rising food and energy bills, exacerbating the economic hardship thousands of hospitality businesses are facing.

Is the uK Experiencing Cyclical unemployment?

Honor & Scarlett

Cyclical unemployment is unemployment caused by a persistent lack of aggregate demand for goods and services, the national output is less than potential output leading to a negative output gap. The UK is currently experiencing cyclical unemployment, as we are entering a recession due to higher energy prices, the conflict in Ukraine, Brexit, and the effect of inflation for industries reopening after Covid lockdowns.  It is evident in everyday life the cost of living has largely impacted many households across the country. The inflation rate is currently at 9.3% with costs such as gas up by 22.7% and accommodation up by 15.5%. As a result of these rapidly rising prices, many households have no choice but to budget, leaving a much smaller amount for their desired goods. Not only does this leave consumers unsatisfied but producers too as their revenue continues to fall uncontrollably as the demand for their products fall. This is exaggerated within the hospitality sector as the lack of need for the service makes it a lesser priority when budgeting.

Firms generate revenue from the

sale of goods and services, so when revenue decreases dramatically, firms experience a fall in their profits. This forces firms to reduce labour costs to maintain these profits to keep their business thriving. The UK is expected to enter a recession in 2023 for nearly 2 years, which in turn may cause GDP to decline by up to 2% in 2023 causing less demand for goods and services leading to cyclical unemployment. This is because cyclical unemployment is inversely correlated to GDP growth. Due to this situation, there will be an increase in unemployment, although this is only in the short term as there are large numbers of vacancies in other sectors. For example, the NHS have 133,000 vacancies at the moment. However, it must be taken into account that, there is a time lag when training for a new job, especially within the medical industry, or alternatively many people may be unwilling to switch professions and will choose to stay unemployed.

Cyclical unemployment is temporary and the severity of it depends on the length and size of economic contraction. Therefore, the quicker the UK recovers from the recession,

the more confidence consumers will have when purchasing, making more jobs readily available with a higher employment rate. As a result, the government may be able to focus more on public sector spending and less on benefits for those unemployed.   The unemployment rate for August to October 2022 increased by 0.1% on the quarter to 3.7%, this is approximately 1.25 million people. In the latest 3-month period, the number of unemployed for up to six months increased across all age groups.

Household real incomes, once inflation is considered, are expected to drop by 7% in the next few years. This will lead to a decline in real consumer spending. Falling Aggregate Demand will cause many firms to scale back recruiting, and many businesses will make redundancies to control their costs. The UK unemployment rate is forecast to climb, reaching 5.5% in 2024, an increase of around 600,000 people.

regulated rail Fares to rise by 6%What does this mean?

Bruno

The Department for Transport has recently stated that rail fares will rise by nearly 6% on March 5th. Transport Secretary Mark Harper said, “This is the biggest ever government intervention in rail fares.”  Inflation stood at 10.7% in November, under the consumer price index measurement used by the UK.  What are regulated rail fares?  There are two types of rail fare: regulated and unregulated.  Regulated fares are overseen by the government following the privatisation of the rails which was completed in 1997. They include most standard, and saver return fares, as well as weekly season tickets. They also tend to apply to London and major city commuter routes as they carry the most passengers.  Why are regulated rail fares increasing?

The 5.9% is in line with the average earnings growth in July of this year rather than the RPI (retail price index), a measure of inflation which is normally used to calculate regulated rail fares.

Figures from ONS showed average earnings growth to be 6% in the private sector and 2% for the public sector in May/July this year. Due to inflation the majority of workers have suffered a cut in real wages. The government says the rise is necessary to support the investment and the financial stability of the railway. Harper said, “I’m capping the rise well below inflation to help reduce the impact on passengers.”  However, rail users are not content with these price rises.

David Sidebottom, director at watchdog Transport Focus, said: “Noone likes prices going up. In our latest research, less than half of passengers think the railway currently performs well on delivering value for money tickets.”

“After months of unreliable services and strike disruption, it’s clear that too many passengers are not getting a value for money service.”

“Capping fares below inflation and the delay until March is welcome and will go some way to easing the pain, but the need for reform of fares and ticketing in the longer-term must not be forgotten.”

This clearly outlines the outrage of over half of the population of rail users.

Labour also condemned the 5.9% rise.  Labour have said the near-record fare rise will mean commuters between Birmingham and London will pay nearly £700 more next year, than this year and the average commuter faces paying a staggering £3,466 for their season ticket, an increase of £1,272, or 58% more, than in 2010.

Shadow transport secretary Louise Haigh also said “This savage fare hike will be a sick joke for millions reliant on crumbling services.

“People up and down this country are paying the price for 12 years of Tory failure.”

The management of rail fares has recently led, to industrial action, with strikes across the rail network for the past 6 months, as unions seek pay improvements and guarantees over working conditions, and this price increase will cause even more upset in an industry that is in turmoil.

NHS pressures –What's Going to Happen?

Jamie & Will

The National Health Service (NHS) has been a staple of the UK culture and economy since its founding in 1948, but as time has progressed its functionality and efficiency has been slowly decreasing towards the point of collapse. This downward spiral has been most significantly worsened by the onset of COVID-19, producing an influx of severely ill patients, pushing the institution to the brink of its capacity. This extreme stretching of resources has only resulted in negative outcomes, with a waiting list of 6.8 million people in November 2022, ambulances arriving hours after the initial call, and overall public satisfaction down the drain.

But what are the fundamental issues causing these problems, and what will happen if they remain unfixed?

One of the root causes behind the pressures the NHS is facing is poor management in correspondence with the rapidly changing population dynamic since the 1950s. In this era, life expectancy was almost 20 years less than what it is today, and the national population was almost 20 million fewer than in 2022. This extensive increase in the number of people and the proportion of the elderly has outpaced NHS expansion, resulting in an overspreading of resources that will lead to excessive debt in the near future. In addition to this, the significant growth in the ageing population in the UK has resulted in a far higher percentage of people requiring treatments, meaning that more money than ever is required to fund a hospital’s expenses. This will have a detrimental effect on the economy, plunging the government into deeper debt, potentially reducing government spending and therefore lowering output. Although, if the right policies had been put in place in the past to aid an NHS expansion,

the extent of pressure would be far reduced.

Another key issue is a lack of coordination with other interacting sectors of the economy. This is mainly accounted for by poor integration between hospitals and social care, meaning that misallocation of resources can occur. For example, when patients are taken out of social care to undergo surgical procedures (often remaining hospitalized for up to several weeks afterwards), their schemes are still funded by the government despite them not being required. This means that a large amount of money is being spent to negatively impact productive capacity

to the low wages received by the workers worsened by the aftermath of COVID-19 and Brexit. During the cost of living crisis with inflation up to 10.6 percent, wage rises are not keeping up with inflation and hence real wages for doctors and nurses are falling. This means many resort to the private sector, vacating a number of job spaces that urgently need to be filled.

when it could be reallocated for better use, making the opportunity cost extremely high. Therefore, developing the interaction of these two sectors of the economy would result in more efficient spending of this squandered investment, leading to sustained and improved economic growth.

A final issue is short staff. MPs have warned that the NHS is facing its worst staffing crisis in history. The large number of job vacancies is even reportedly posing a serious risk to patient health. The NHS is now short of 12,000 hospital doctors and over 50,000 nurses, the worst workforce crisis in the 75-year history of the NHS. Whilst the workforce in the UK grows, the opposite is true for the NHS, and a reluctance to plug this staffing gap could ultimately threaten plans to tackle the Covid treatment backlog. The main reason for this crisis is evidently down

In conclusion, the results of poor management is a clear example of government failure. The misallocation of resources among interacting sectors and the staffing crisis, on top of the COVID-19, has resulted in the decrease in functionality and efficiency of the NHS, to the point where it is almost on the brink of collapse. The lack of government funding and refusal to increase real wages has resulted in patients’ lives being put at risk, further worsened by the unsuccessful strikes in attempts to increase real wages. The collapse of the NHS has come down to a period of government failure to support them in times of urgency such as the Covid crisis. If the government had put in the right policies in the past, then we may have seen an expansion in the NHS, rather than the worst staffing crisis seen for 75 years. A government scheme to recruit and retain more staff must be put in place, and quickly, or we may see the ultimate collapse of the NHS.

Exxon Mobil Matt

Exxon Mobil is a 450-billiondollar company specialising in the exploration and production of crude oil and natural gas. The company (based in Texas) is the largest producer of crude oil in the United States. Recently, oil producers worldwide have come under immense scrutiny for the sheer scale of profits made during 2022. Governments have accused these firms of “war profiteering” because of the increase in profits caused by Russia’s invasion of Ukraine. Due to the substantial increase in oil and natural gas prices, Exxon has experienced bumper profits of 20 billion dollars between July and October 2022 which is equal to the total profit generated in all of 2021.

In September 2022, the EU announced an assortment of windfall taxes on energy firms’ extortionate profits in 2022 and 2023. The most prominent tax is actually on the profits of renewable energy producers who have benefited massively from the fivefold increase in electricity prices across the EU. This tax is expected to raise 117 billion dollars

by taxing at 100 percent when the wholesale price is above €180 per MWH, which is 60 percent less than the price of electricity at its peak.

In addition, the EU also expects to raise 25 billion dollars by raising the tax rate on oil firms to 33 percent.

In total, the EU can raise 140 billion euros in windfall taxes which can be used to provide subsidies to increase energy efficiency.

In light of this legislation, Exxon Mobil has sued the EU arguing the taxes are “counterproductive” as they decrease investment into renewable energy. In addition, the taxes would increase the strain on European industries and increase reliance on imported energy as investment into the EU is deemed less attractive because of higher risk to reward.

Exxon expects to take a hit of 2 billion dollars on their 2022 profits alone due to these measures.

The new windfall taxes are going to have a significant effect on Europe. On one hand, Brussels has

a €140 billion war chest to increase overall energy efficiency and to meet their target of decreasing overall energy consumption by 10 percent. On the other hand, these taxes actively reduce investment in renewable energy and slows down the transition away from fossil fuels which currently supply 55 percent of the EU’s energy. In addition, Exxon has played a vital role in reducing the EU’s dependence on Russia by investing 3 billion dollars in refinery projects in the EU since 2010. I believe that in this current socio-economic political climate the EU cannot afford to make enemies with energy producers particularly when it’s need for new supplies has never been so great. In the future, we can expect energy costs to rise due to the lack of investment in increasing future production capacity.

Could Sugar Tax Be used to Fund Free School Meals?

Senura

A staggering 1.89 million pupils nationally were eligible for free school meals in the 2021/22 academic year,

22% of the student population. Inflation reaching record heights and soaring energy prices are set to push more households into poverty resulting in an increased reliance on free school meals and 300,000 more eligible pupils than previous academic year. With this figure on the increase what is the solution?

Sugar Tax

Officially known as the soft drinks industry levy (SDIL) places a charge of 24p per litre on drinks containing 8 grams of sugar per 100ml and 18p per litre on drinks with 5-8 grams of sugar per 100ml. In simper terms a single can of 330ml coke containing 35grams of sugar has 8p extra cost just from sugar tax. However, drinks containing high milk (calcium) content and pure fruit juices are exempt from this tax. Overall, in the financial year of 2020-21 the UK government raised £301 million from sugar tax alone. The revenue has been distributed to primary schools to help fund physical education as well as funding breakfast clubs in over 1700 schools. Despite this more can be done to help fund free school meals. Currently it costs the government £457 to fund one pupil’s school meal for a year, meaning that revenue from sugar tax could provide free school

meals to at least 650,000 students in a year, thus, helping thousands of families in the UK withstand the cost-of-living crisis. Additionally, the long-term rewards are sustainable as pupils will be able to focus better on lessons and achieve an elevated level of education boosting the future economy with an array of skilled workers increase output and productivity in the country.  However, for every pupil’s requirements to be met there must be significant revenue made from sugar tax. Because of the tax, firms are increasing prices to combat the higher costs of production (e.g., coca cola have increased their standard can from 70p to 80p), so consequently there may be a fall in demand for these products. Consumers are switching to sugar free alternatives which are cheaper, which may lead to a healthier population but also diminishes the revenue made from sugar tax, hence leading to insufficient funds to ensure every pupil who requires free school meals can access them. Furthermore, as the number of pupils eligible to

free school meals is growing funding will be an issue, but if additional taxes on other sugary items were to be added and more individuals to voice their opinions (e.g. Jamie Oliver famous TV chef and professional footballer Marcus Rashford have campaigned for free school meals) then the issue of free school meals can be solved.

To conclude sugar tax can be used to fund free school meals as forecasts suggest that the revenue made each year is only set to increase, allowing for more pupils to access free school meals in the future and to combat food insecurity across the country. This shows that even buying a fizzy drink can help provide a child with the necessary meal that they require.

Mrs Carr's Sunday roast Alternative: Goat's Cheese & Mushroom Wellington

Ingredients

1 red onion

Olive oil – 1/2 tbsp

Salt – to taste

Pepper – to taste

Balsamic vinegar – 1tbsp

Butter – 1 ½ tbsp

Chestnut mushrooms – 150g

Button mushrooms – 150g

Garlic – 5/6 cloves

Dried mixed herbs – 1tbsp

Fresh spinach – 250g

(Optional) Roasted chestnuts – 75g (approx. 8)

(Optional) Walnuts – 20/25g

Fine breadcrumbs – 2-3 tbsp

Goat’s cheese – 50g – leave it out if you are going to make the wellington vegan or use a plant-based substitute

Nutmeg – ½ tsp

Puff pastry – one pack

Egg/milk – for brushing the pastry

Instructions

1. Finely chop your red onion (use a mini chopper to save time) and cook in olive oil with a pinch of salt on a medium heat until soft. Add in balsamic vinegar and wait for the liquid to evaporate – then transfer to a bowl to cool down. Alternatively, cook the onions until soft, transfer to a bowl to cool and then add the balsamic vinegar. Leave the onions to the side whilst you get on with the rest of the recipe.

2. Fine chop your mushrooms. Save time and chop them in your blender. In a pan, melt butter, sauté the mushrooms, until the juices release. Add the garlic and the mixed herbs.

3. Once all the liquid has evaporated add the chopped spinach in the pan. Wait for it to wilt and all the water to dry out. There will be a lot of liquid, so you will need to be patient until there is not any liquid. If you are using the nuts, add them in now, chopped finely.

4. Let the mushroom mixture to cool down. Then transfer it to a large bowl, mix with the onions, breadcrumbs, salt, pepper and nutmeg.

5. Pre heat your oven to 180 degrees

6. Roll out your pastry (buy it from the supermarket, where it comes pre-rolled). Tightly pack your mixture in the middle like a sausage. Add in the goat’s cheese, put it on the top of your mixture and on the sides of your mixture. Fold one side of the pastry over the mixture, brush milk/egg to seal then fold the other side of the pastry over – brush with milk/egg. Use a fork to press down the pastry so it is sealed tightly. Fold over the two longer ends and do the same thing.

7. Turn your pastry over. With a knife score a design. Brush milk/egg on top.

8. Put in the over for 30-45 minutes until golden and remember to over your wellington to ensure that the pastry is cooked at the bottom. Cook at around 180-190 degrees.

The uK public Sector Strikes –all you need to know about Airport & rail strikes, what impact do these have on the Economy? &

why are they striking?

Jamie & olly

Rail – Recently, rail trade unions have been in dispute with both the government and rail companies, regarding wages, job cuts and changes to terms and conditions. Trade union members say that the wages of the workers should reflect the rapidly increasing cost of living, and they feel that the wages that they receive are insufficient to be able to meet daily needs. The Office for National Statistics (ONS) has estimated the average salary of rail workers in 2022 was £45,919. However, when drivers are excluded, the average salary falls to £39,518. Despite this, the RMT still suggested that this figure was too high, as it did not include the rail cleaning staff when calculating the average. In addition to the insufficient wages, there is also significant job uncertainty in the rail industry. Network Rail is planning to cut 1,900 jobs as part of changes to the way its maintenance teams work. With these factors combined, it has led to the strikes, to signal to employers to reduce planned job cuts and increase their wages.

Airport strikes - UK Border Force staff were also striking over the busy festive holidays at airports across the country in a dispute over pay and working conditions. Passport checks at Heathrow, Gatwick, Manchester, Glasgow, Cardiff, and Birmingham airports were amongst those disrupted, the PCS (public and commercial services) union stated. Days affected included 23rd and 28th of December causing nightmare for hundreds of thousands of people trying to see their relatives over the

festive period. The announcement for the beginning of these strikes came on the same day Rishi Sunak promised “new tough laws” to curb the impact of industrial action as he criticised “unreasonable” unions. Mark Serwotka, the PCS General Secretary, announced the dates after 100,000 PCS members in 214 government departments and other public bodies voted to act in support of a 10% pay rise, pensions, job security and no cuts to redundancy terms.

Why are the strikes not working?  The government and companies are unwilling to offer higher wages to the workers due to several reasons. Arguably, the most significant one is the governments fear of the wageprice spiral. This model involves the workers initially bargaining for higher wages. For the process to work, we assume that the workers then receive these higher wages. Because these workers are mostly members of lower socio-economic groups who are struggling with the cost-of-living crisis, their marginal propensity to consume (MPC) is likely to be large. A high MPC means that the workers spend a large proportion of their increased income in consumption. Consequently, the increased demand for goods and services in the economy (due to the increase in wages and resultant spending) will lead to demand pull inflation. Inflation is already at 9.2%, so it is adding to a already dire situation. Again, the increased inflation will mean that the purchasing power of the workers’ income falls, leaving them

in yet another cost-of-living crisis as they cannot afford the necessities. Ultimately, the economy is left in the same situation it was before, only with higher inflation which is detrimental to the economy. So, after taking this into consideration, it seems reasonable that the government is unwilling to increase the wages of the rail workers.  Effect on the economy? Rail cancellations have hit a record high, with more than 314,000 fully or partly cancelled trains in Great Britain in the year to October 2022. Britain’s pandemic-hit hospitality sector will have lost £2.25billion to strikes this year if unions thwart hopes of a Christmas boost via promoting and organising strikes. And with transport strikes costing the economy £300million a day, Britain now faces a £4billion bill. The Treasury has warned that giving all public sectors an 11 percent pay rise in line with inflation would require the equivalent of a hike in the basic rate of tax of more than 4.5 percentage points, or a VAT increase of more than 3.5 percentage points. It says the total cost would come to around £28billion or the equivalent of £1,000 per household. The Institute of Economic Affairs says the country could lose £300 million per day because of people not being able to work or going on strike. In conclusion, because of these strikes domestic demand-pull inflation would skyrocket further due to an increase in real incomes, and furthermore domestic economic growth is being run into the ground with output and productivity being slashed due to the union led strikes.

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