Equilibrium Lite December 2020

EQUILIBRIUM LITE IN THIS ISSUE UK & GLOBAL NEWS UPDATE THE UK'S NATIONAL DEBT POST-COVID SHOULD WE FORGIVE INDIVIDUAL DEBT? MOST EXPENSIVE COUNTRIES TO LIVE IN OFFSETTING CONSUMER BEHAVIOUR TESLA'S TRANSFORMATION THE ECONOMICS OF VACCINATIONS

DECEMBER 2020 ISSUE 2

UK & GLOBAL NEWS UPDATE ALY SHAMSI UK Update: Brexit negotiations have reached crunch point with the transition period ending on the 31st December. The main sticking points remain: fishing, agreeing ‘level playing field’ measures for businesses and resolving future disputes.

Rishi Sunak, Chancellor of the Exchequer, announced a Spending Review to set out his plans for the economy next year. Public sector pay is set to be frozen whilst foreign aid will be cut from 0.7% of GDP to 0.5%.

The Chancellor believes that the economy will not return to its pre-COVID-19 size until 2022 with the Office for Budget Responsibility (OBR) forecasting rates of GDP growth of 5.5% in 2021 and 6.6% in 2022.

The OBR has also decreased its forecast for the peak unemployment figure from 12% (July estimate) to 7.5%. This would represent the lowest recessionary peak in unemployment since the 1970s, and significantly lower than that seen after the 1990-1991 and 2008-2009 recessions.

UK public borrowing is set to reach a post-war high of £394bn or 19% of GDP this year however most importantly the cost of servicing this debt will reach a post-war low due to the current interest rate of 0.1%.

UK supermarkets Tesco, Sainsbury’s, Morrisons, Aldi and Lidl and a number of other retailers are returning over £1.9bn in business rates relief.

Global Update: The OECD (Organisation for Economic Co-operation and Development) revised up its forecasts for the global economy and predicted a faster recovery if vaccines are rolled out quickly.

The Dow Jones (share index) surged passed 30,000 points for the first time driven by the announcement of the COVID-19 vaccine approval for use.

American President Elect Biden announced Janet Yellen as the first female Treasury Secretary.

Activity in manufacturing and services accelerated in China in November, underlining the resilience of the world’s second largest economy.

Argentina has been suffering with a recession for several years with the IMF intervening to provide a US$57 bn programme following their currency crisis. · The UN warned that the pandemic is likely to push an additional 44m people into extreme poverty by 2030.

THE UK'S NATIONAL DEBT POST-COVID AALIYAH PATEL & ZOE ST JOHN 2020 is a year which has brought tremendous economic uncertainty to the UK. National debt rose to never-before-seen figures. Before the crisis the government was expecting to borrow approximately £55 billion this financial year but now it is estimated that government borrowing will be approximately £394 billion.

The government has spent hundreds of billions of pounds on measures to support businesses and jobs, and to support the economy through and out of the crisis. For example, the government paid out £43 billion for the furlough scheme in order to save the livelihood of millions of workers. Reduced tax rates and increased government spending has led to a fiscal deficit (when government spending exceeds tax revenue received in a year), meaning borrowing must occur. The UK Conservative government has already spent more than £500 million to cover the cost of the Treasury’s Eat Out to Help Out Scheme.

The UK in total has borrowed money that equates to more than the size of Israel’s economy as of 2020; and more than the economies of New Zealand and Qatar put together.

But what does this mean for the future economy? The independent forecaster for the OBR (Office for Budget Responsibility, which keeps tabs on government spending), warned that tax rises, or spending cuts would be needed for future years to stabilise the UK’s growing debt pile. However, this will create controversy because the Conservative 2019 manifesto promised not to raise the three biggest taxes (income tax, national insurance and VAT).

Also increasing taxes would mean that people have less disposable income (personal income that remains after taxes are deducted and state benefits added), which could slow the economy down further as they would be spending less.

It is predicted that the UK economy will not return to its pre-crisis size until the end of 2022.

Office for National Sartistics, OBR

SHOULD WE FORGIVE INDIVIDUAL DEBT? MANISH VEKARIA The concept of a debt jubilee dates back to as early as 1792 BC when King Hammurabi of Babylon cancelled all debt to the government and its officials. To clarify, a debt jubilee is a clearance of debt from public records across a wide sector. We’ve seen glimpses of an entire nation’s worth of debt being cancelled (such as in post WWII Germany) through the years. With public debt levels in such a devastating state following the outbreak of COVID19, the question as to how we’ll pay this debt off is topical.

Initially, I thought it would be utterly wrong to allow some households to escape significant debt whilst others have worked so hard to prevent it. However, we’ve already seen schemes put in place - such as one-off payments - which are subtly helping those in debt.

In the US, people working in food services (pre-lockdown) now receive more than 150% of their previous income without actually doing any extra work. This shows how governments are strategically using the lockdown to (indirectly) pay off some debt.

With saving rates increasing and spending opportunities narrowing, jubilees could be used to help the economy . Although paying off debt only transfers it from households and firms to the government, if inflation does eventually rise, the real value of this debt will decrease and perhaps might put the country in a better position than where we started pre-COVID.

Source: US Bureau of Labor Statistics

MOST EXPENSIVE COUNTRIES TO LIVE IN MAYA TRICOT & KATYA ISRAEL In order to compare how expensive it is to live in different countries we must evaluate different countries' cost of living index (Numbeo). This is a measure that compares the expenses of an average person, such as accommodation, clothing, transportation, price of groceries, healthcare and basic human necessities that people need on a day to day basis.

Another way that people evaluate different countries cost of living is by asking the question ‘How many goods and services does a given sum of money purchase in a certain location?’. For example, US$100 tends to purchase more goods and services in Denver than it does in New York City (as New York is a more expensive place to live.)

Source: Numbeo- Cost of Living Index One of the main reasons why the same goods have different prices in different countries is due to taxes (including import duties- a tax on imported goods which have the effect of raising the domestic price of imports and thus restricting demand for them.) For example, Brazil has an extremely high import duty of 80% on some imports, which makes imported goods, such as cars, much costlier there than in other places. Another important factor is the perceived value of goods or services – the same product may have a much higher perceived value in one country than in another. A common brand might be more ‘highly regarded’ in one country and could be sold as a premium brand there, even if the same good in another country was considered a basic everyday item. As well as this, due to changes in demand and supply there are different rates or levels of inflation (a sustained rise in the general price level) in every country. Other factors, such as transaction costs (including exchange rates) and transportation costs all impact how an item is priced in a particular country.

According to the index, Bermuda is the most expensive place in the world to live due to very expensive rent on houses and apartments, large import taxes and very high school fees.

OFFSETTING CONSUMER BEHAVIOUR LUCAS VALLADARES Did you know that anti-lock brakes, a tool designed to minimize the risk of skidding during braking, actually resulted in users driving closer to the vehicles in front of them?

A device intended to increase safety, and one which was expected to massively reduce rates of traffic accidents, greatly under-performed and ended up merely having a mild positive impact. The same logic applies to knee-pads; a lot of people report feeling the same rate of injury regardless of wearing them or not. Why?

Well, if you have an anti-lock brake, what’s the risk compared to driving without one? It’s significantly lower, and even if you get closer to the car in front, the anti-lock brake will save you. Right? Unfortunately, that’s the mentality which results in safety features like these having a minimal impact. Offsetting consumer behaviour is the theory that safety policies, focused on minimizing risk, cause consumers to change their behavioural patterns and act in more risky ways because they perceive themselves as naturally safer, resulting in a reduction in the positive effect of safety mechanisms. Without the protections offered by the safety device, the consumers feel more concerned for their own wellbeing and feel less reliant on technology and thus they look after themselves better.

It’s crucial to acknowledge offsetting behaviour because it means that safety policies must be accompanied with clear instructions and reminders for the consumer to still focus on safe actions and not make their behaviour riskier.

TESLA'S TRANSFORMATION OLIVER ZIFF Before 2015, I can vividly remember times where I would be amazed seeing a Tesla car driving down the road. This vehicle would’ve been one of the limited 50,000 cars produced that year. Fast forward five years, production has increased 10-fold and the company is now being valued at over half a trillion dollars. Historically, experiencing success like this was unheard of, so how have Tesla accomplished this in such a short period of time?

Improvements in quality and performance, expanding both range and efficiency and heavy investment into increasing production are just three reasons why Tesla is dominating the electric car industry. Their cars are efficient with top tier performance, achieving the most range per kWh beating all other current competitors. The company currently operates three ‘Giga’ factories; two in the US and one in Shanghai. However, another two factories are in progress, one in Berlin and a third US factory. Elon Musk, the CEO of Tesla, explained that ‘having a factory on every continent would reduce delivery time, reduce the distance cars must be shipped and massively increase production.’ Tesla is attempting to push the cost of production down, in order to make their cars and other solar energy products much more affordable for the consumer, thereby increasing demand.

One final reason why Tesla will lead the electric vehicle industry is due to the rise in government policy pledging to phase-out fossil fuelled vehicles. Governments are also choosing to introduce added costs on non-electric vehicles in order to incentivise consumers to purchase electric vehicles. With this legislation, Tesla looks prepared to embrace the changing future that lies further along the road.

THE ECONOMICS OF VACCINATIONS MS M SOROHAN COVID -19 vaccination is underway with the UK currently undergoing its biggest ever mass immunisation programme. The COVID-19 vaccination presents significant economic challenges, not only in terms of cost but also the possibility of two opposite scenarios; either serious shortages or a waste of doses due to public reluctance to take up the medication.

In economics, the term inelastic price elasticity of supply is used to describe the responsiveness of production of a good or service following changes in demand. The likelihood is, that the supply of vaccines will prove to be inelastic to a degree due to issues related to manufacturing capacity, availability of critical resources and storage facilities.

The issue of take-up of the vaccine can be linked to the existence of positive externalities resulting from consumption. A vaccine will provide private benefits to the individual as well as producing positive spillover effects to third parties who now face a reduced risk of contracting the virus. As a result, the social benefits of vaccination exceed the benefits to individuals from take up.

In a free market without government intervention, there will be under-consumption of goods with positive externalities since consumers only consider their own private benefits.

In addition to providing the vaccine for free, governments can 'nudge' behaviour with the provision of information. Facebook has recently announced that it will remove false claims about COVID-19 vaccines from its social media platforms. This can help to address information gaps and encourage individuals to take account of the social benefits of vaccination.

It is estimated that 60% - 70% of the global population must be immune to stop COVID-19 from spreading easily. The highest level of global immunisation recorded is 88% for Tuberculosis in 2019.

EDITING AND DESIGN TEAM: ALY SHAMSI JAY BATAVIA ANJALI PATEL KARISHMA KARA STAFF SUPPORT TEAM: MRS G LYONS MS M SOROHAN

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