Politics 33
32 Nottingham Economic Review
Same drugs, worlds apart
source of growth in employment in recent years. The Labour opposition opposes the level of public spending cuts, although being somewhat vaguer as to what tax rises should replace them. The second issue, of how rapidly to reduce the deficit, raises more interesting issues for economic analysis. The budgetary stance of the government (i.e. how rapidly it brings the budget deficit down) has to steer a careful line between the Scylla of losing credibility with financial markets and the Charybdis of plunging the economy back into recession. This means that if the financial markets perceive the plans as not credible or too slow in restoring balance, then they will be unwilling to purchase the bonds required to finance the deficit; on the other hand, if the cuts drag the economy into a second recession, restoring the budget balance will be that much harder. On bond markets, both sides of the argument have a point. When only Greece and Iceland seemed to have serious budgetary problems, the risk of the UK losing its creditworthiness seemed remote. But the ‘domino effect’ of adverse investor confidence on other countries such as Ireland, the other Mediterranean countries and even Germany at one point, suggest that all countries have to be wary of the shifting climate of investor opinion. The coalition government points to the fact that it was able to sustain large bond sales through 2009-2010 without any rise in the basis point premium to UK gilts on sovereign debt markets, but
By Benjamin Allen
it should not be forgotten that through much of this period the Bank of England was engaged in ‘quantitative easing,’ which saw the Bank buying a large fraction of the UK government’s newlyissued debt. The test of whether the government can repeatedly finance large ongoing deficits, without a rise in interest rates paid to international lenders, has yet to be fully tested. Only time will tell whether the opposite risk, of prolonging recession, is an outcome of the government’s budget stance. Labour plans at the time of the last General Election implied a return to budget balance by the end of 2016-17 – at least a year after the plans of the coalition government. But even this restoration of budget balance by Labour relied on certain tax increases (such as a rise in National Insurance contributions), which have not been implemented,
and which the current opposition spokesmen are reticent to confirm are a continued part of Labour’s economic strategy. Most current analyses, including the report by Barclays Capital in the influential Green Budget published by the Institute for Fiscal Studies (IFS), suggest that growth will be more muted than that projected by government spokesmen and by the newly created Office of Budget Responsibility. This implies a greater probability that the government will miss its target of budget balance by 2015. However, a response to this of cutting harder surely risks a lowering of business confidence and, as the IFS suggests, a ‘Plan B’ of allowing a little more flexibility in the target, whilst retaining the current broad economic strategy, seems to be a sensible response to the budgetary problem.
When GlaxoSmithKline chief executive Andrew Witty declared in January that GSK would be making price cuts to drugs in developing nations and reinvesting 20% of profit from those nations back into the local economy, few could doubt his sincerity. Unsurprisingly though, Witty himself made no secret of the insignificant amount involved, as GSK’s profits in developing nations are as little as 5m. It seems an overly accepted consensus that a little is quite enough when it comes to creating balance in the international drug market. The conflicting and intensely politicised interests of the stakeholders involved in this market are the main reason for this. These have developed into a screen play of antagonism between social, legal and economic pressures. For the pharmaceutical companies the driving force is economic growth. This growth however can come into conflict with the interests of customers who rely on these medicines to be available, accessible, and as cheap as possible. What is key in this dynamic is that, whilst for pharmaceutical companies efficiency is measured in profit margins, for the consumer true efficiency is attained when drugs are at their cheapest and used most effectively. Confined as a national problem, this dynamic is a significant hurdle to a more fluid drugs market
but the implications internationally, especially on the developing world are seismic. The problems in the developed world operate as an intense sub-plot to greater international concerns. Qualms for the patient in the west centre around costs, rebranding of the same compound medicines, thus creating waste, not using cheaper alternatives, as well as the strangely American phenomenon of unnecessary over-prescription. In America, drugs companies have found huge benefits by finding a way into the doctor-patient relationship, where GPs may receive incentives to promote certain drugs, often giving patients the illusion that they need a particular drug. Similarly,
as one of only two nations in the world which allows direct drug company to consumer advertising, a habitual drug taking culture has arisen. One salient example is the painkiller Vioxxhaving spent more money on advertising annually than Budweiser, concerns were raised that this unnecessary spending increased the price of the drug. The nadir of Vioxx’s problems came when the drug was withdrawn after adverse reactions increased heart problems, hospitalising 1.5 million Americans and being attributed to 100,000 deaths. This is one of many prominent examples that all serve to illustrate that through the search for higher