What’s happening with HS2?

Hello readers, welcome back to my blog on economics related news!

Last time I did something slightly different. Instead of focusing on one interesting economics related story, I tried to predict, and analyse what the future could hold for 2017. If you didn’t get a chance to read it, I really do recommend it as it will certainly prepare you, as well as help you to understand some of the key problems the world is facing today. If you did read it, you might remember me saying how Brexit and Mr Trump are going to have significant effects on the rest of society for better or for worse. I also mentioned that even though we may not have agreed with the outcome or are frustrated with it; it is vital for the sake of future generations that we keep up to date with the current situation and build a stronger economy going forwards.

This week, however, I am giving you all a ‘cooling off period’ before next week where I will be specifically looking at both Mr Trump and Mrs May simultaneously and the effects of their actions so far such as Trump’s announcement to actually build the wall across the Mexican border and Mrs May announcing on Tuesday that Britain can no longer be part of the single market. I will be focusing on the HS2 rail project, something, that hasn’t been discussed very much in the news for a while. Most of us have probably heard of it and know what it’s all about, but don’t know when it is likely to be implemented, what the economic costs and benefits are and whether or not the money was justified or if it could have been spent in other areas that are in greater need such as the NHS or in education. A healthy, well-educated workforce as I have previously mentioned, ensures that the economy is economically efficient. Proponents of HS2 would counter this by saying that, better transport links and connectivity across the country can reduce commute times, congestion and can also lead to a more efficient workforce but is spending in excess of £55 billion which leads to a slight reduction in travel time really economically viable? In short, this is the basis of the ‘fundamental problem in economics’ that economists are facing all the time: How best to allocate scarce resources among competing users. Because of scarcity we have an opportunity cost, in this case, the opportunity cost of spending on HS2 is the money spent on the NHS.

If you are keen to learn more about this project and want to find out exactly what is happening, then you have come to the right place. In a few minutes, you will be an expert on this subject and can impress all your work colleagues with your enhanced knowledge of something, which has been hidden amongst all the prime media out there at the moment. This post might be a little longer than usual but hopefully, you will learn new things you didn’t know, without even realizing.

As always please post any ideas that you wish to share below or email them to me at rajveersira@gmail.com. Also if you are enjoying reading rsira-economics.com each week and know someone that would enjoy reading it too, please do share it with them and ask them to follow, if they are interested.

 

Before we get into the economics, what exactly is HS2?

HS2 stand for high speed 2 and is a planned high-speed railway in the United Kingdom linking London, Birmingham, the East Midlands, Leeds, Sheffield  Manchester. You might be wondering well what happened to HS1. This is actually already in place and it was the first high-speed rail line in Britain, which connected London to the Channel Tunnel. HS2 consists of two main phases. Phase one is for a new railway line between London and the West Midlands carrying 400m-long trains with as many as 1,100 seats per train. These trains would travel at speeds of up to 250mph, which is faster than any other train in Europe, and they would run 14 times per hour.

The second phase, which is ‘V-shaped’ will improve links and services from Birmingham to Manchester and Leeds. The Department for Transport says there will be almost 15,000 seats an hour on trains between London and the cities of Birmingham, Manchester, and Leeds, which is three times the current capacity.

 

Why was the project needed in the first place?

London is known as the capital of the world and is almost its own country in one respect. With the price of a 2 bedroom apartment costing upwards of £800,000 (more on that another week), it is clear that this city is booming and is attracting people from all over the world. It was also found that without London the UK would have the same GDP as Spain. The criticism is that other parts of the country are not growing at the same rate and that London has overtaken them and is now so far ahead leading to a ‘North-South divide’. HS2 would help alleviate this issue by linking other major cities in the UK to each other. An article by the Guardian explained how the UK’s productivity is lagging behind other major economies. In the time a British worker makes £1, a German worker makes £1.35. HS2 will almost certainly improve productivity and speed up the flow of people, goods, and services. Think of it like faster Wi-Fi. Less time buffering, and more time actually getting on with what you want to do/watch.

The images below help to understand this idea visually. In a world, which is so technologically advanced and is governed and shaped by new tech, it is vital that the UK stays ahead of its competitors.

 

screen-shot-2017-01-29-at-18-19-05screen-shot-2017-01-29-at-18-19-01        VS

Existing set up- 125mph                                                  Trains which can travel up to 250 mph

 

Costs and Benefits of HS2

 

Benefits:

  • Will reduce dependence on domestic flights, lower CO2 emissions and is one step further to providing more sustainable transport
  • Will allow more operators to get involved and interested, increasing competition and potentially reducing fare spikes. However, the opposite could also happen, as companies are likely to charge a premium for the ‘time saving’ gained by using these trains.
  • Significantly increase productivity in the UK and will provide jobs for over 40,000 people. This could reduce the costs for businesses and improve the overall economy.
  • Groups such as the Campaign for High-Speed Rail say there will be added knock-on benefits, while some MPs believe it could be a catalyst for economic growth and help rebalance the economy between the ‘North and South’.

 

Costs:

  • Places further away from the line, like Wales, aren’t expected to see any economic benefits and could lose jobs as a result.
  • The Wildlife Trusts say both phases directly affect nature reserves and wildlife sites, which could lead to a net loss in biodiversity.
  • Historic buildings are at risk of damage or demolition, and local residents will face noise pollution
  • Thousands of people living in Camden, north London, face years of disruption during phase one. Parts of the Regent’s Park Estate will also be demolished
  • The current £42.6bn budget makes it more than ten times the cost per kilometre of some global counterparts.
  • This price has been criticised by campaigners, who have said it is “abysmal value for money”.
  • Unrealistic timetable, and many groups such as “Stop HS2” have said it is likely to be a ‘White elephant’

 

When is it likely to be implemented?

  • The first phase of the £56bn railway is due to open in December 2026, however the Public Accounts Committee is calling it “overly ambitious”.
  • The onward legs to Manchester and Leeds could start being built in the middle of the next decade, with the line open by 2032-33.
  • The search for a company to take on the £2.75bn contract to build high-speed trains for the HS2 rail network got underway this year. The Department for Transport said up to 60 trains, capable of speeds of about 225mph, were needed. The contract will also involve maintaining the fleet and this will be awarded in 2019.
  • Construction has already begun and it is expected to reduce rail times between Birmingham and London by 32 minutes

 

Below are a few images showing the whole project and the areas that will be affected:

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Sources used:

http://www.bbc.co.uk/news/uk-16473296

https://en.wikipedia.org/wiki/High_Speed_2

http://cep.lse.ac.uk/pubs/download/cp361.pdf

http://www.bbc.co.uk/news/business-38684010

https://www.theguardian.com/business/2016/nov/24/why-is-uks-productivity-still-behind-that-of-other-major-economies

http://www.telegraph.co.uk/news/2016/03/21/revealed-hs2-abysmal-value-for-money-at-10-times-the-cost-of-hig/

 

Still want to know more? Have a read of the article below:

http://cep.lse.ac.uk/pubs/download/cp361.pdf

 

If you’re still a bit unsure about the whole Brexit process, what has happened and where the UK stands then I recommend that you read this article by the BBC below, before next week’s post, which explains everything there is to know about Brexit in a nutshell.

http://www.bbc.co.uk/news/uk-politics-32810887

What to expect in 2017.

Hello readers, Happy New Year!! And a warm welcome back to rsira-economics.com.

2016 has been, an ‘eventful’ year with a number of shocks and surprises, for better or for worse. Although I suppose that’s what economics is fundamentally about – how we respond to an ever-changing economy and make decisions to maximize utility. From President-elect Trump in the USA and Brexit in the UK, many are hoping that 2017 will be a more ‘normal’ year.

 

In today’s post, I will be doing something slightly different. I will be predicting what I think and what other economists out there think is likely to happen in 2017. Before you say it, no I’m not a mind reader, or fortuneteller or something completely irrational like that. Economists like to use something quite sophisticated, it’s what they call probability distribution, which is in a sense where they make educated guesses based on data to analyse the economy. They also look at what could happen and base many aspects on speculation. In fact, the whole brexit process has purely been speculation. Since the referendum result on June 23rd, nothing has actually changed in terms of deals or agreements, yet many businesses were reconsidering investment into the UK and more noticeably the pound hit a 31 year low.

I hope to keep this post short and to the point, and will stick to just 4 predictions/hopes for the year 2017. If you have the time please give this post a quick read; it will be shorter than usual and might give you some useful insights into what to expect this year and to prepare yourself for what might be about to come your way. As always please post any ideas that you wish to share below or email them to me at rajveersira@gmail.com

Also if you are enjoying reading rsira-economics.com each week and know someone that would enjoy reading it too, please do share it with them and ask them to follow, if they are interested.

 

2017 in a nutshell:

  1. ‘To Brexit or not to Brexit that is the question’?

Unfortunately, it seems there is only one answer to this question. Echoing Theresa May’s words, ‘Brexit means Brexit’ and now it is pretty much impossible for the decision to leave the European union to be reversed. The two questions looming over our heads for 2017 is what will happen when Britain leaves the European union? And will Britain still have access to the single market? The outcome of this, especially if we opt for a ‘hard’ Brexit (no access to the EU single market), will greatly impact companies and business as well as the everyday consumer as discussed in last year’s post.

For the next few months, you are likely to hear many complex words in the economics jargon all over the news, from inflation to interest rates and ‘animal spirits’ of what could and could not happen. All you need to know is that if Mrs. May opts for a ‘hard’ Brexit it is likely to cause the most uncertainty, and this is favoured by ‘brexiteers’ because it prevents free movement of people. A ‘soft’ Brexit will closely resemble the current set up and will have less of an impact on firms but will still allow free movement of people, something which many who voted Brexit are against and was the ultimate reason why they voted Brexit.

However, it is still not certain as to what Theresa May has got in mind for the future of the UK. A recent article from the Guardian suggests that we could be heading towards a hard Brexit and that the prime minister is said to be preparing to make clear that she is willing to sacrifice the UK’s membership of the single market and customs union in order to bring an end to freedom of movement. According to an article in the economist this week, they said, “Theresa May does not really know what she wants”. Since Brexit was such a shock, ministers did not really plan for how we would actually ‘Brexit’.

What I think will happen: I believe like the Guardian that Britain will opt for a hard Brexit. Mrs. May has made it clear from the start that Brexit means Brexit and that she would like to fulfill the request of the majority of Brexit voters of controlling immigration. Following this it is unlikely that the EU will allow the UK access to the single market and so confidence in the economy will go down, house prices could fall, inflation could rise due to a further drop in the value of sterling reducing the real purchasing power of money and making it harder for people to afford everyday items. Unemployment which is at an all-time low in the UK could rise as firms lose confidence and don’t hire more workers. In the long run, things may look better as Britain makes new deals with countries all over the world and comes to some arrangement with the EU. It is almost certain that the UK will continue trading with the EU as the UK needs the EU and the EU needs the UK. Everything is still very uncertain and risky, but it is clear that a hard Brexit will cause some sort of economic turmoil before we see any benefits.

screen-shot-2017-01-15-at-20-54-17

 

2. Oil prices to go up or down?

Last year I  discussed the irony of how oil is a finite source and that the worldwide supply is being depleted, yet the price can actually go down. Oil prices are always of concern to consumers as they can cause inflation and make everything more expensive. This is particularly damaging if incomes are not rising at the same level. My prediction for oil prices is that they will rise from their low levels of about $53 dollars a barrel, due to OPEC’s intervention and cut in oil supply, although I don’t think they will rise above $100 a barrel as these prices encourage further investment into oil production/exploration which will then cause excess supply forcing prices to drop dramatically. In addition, an article by the BBC stated that the United Arab Emirates has said that it intends to invest $163bn (£134bn) in projects to generate half of the nation’s power needs from renewables by 2050 in order to balance economic needs against environment goals. The UAE has a powerful influence on oil prices and heavily relies on it to fuel its growth. If they are starting to consider alternatives now and diversify their economy by promoting tourism instead, it is likely that more countries will start making the switch to alternatives and overall there will be less demand for oil in the world.

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Screen Shot 2017-01-15 at 22.06.28.png

 

3. America and a new man in the white house

Will trump really ban Muslims and build a wall?

Donald Trump made some powerful statements that he is going to call for a ‘complete ban on Muslims entering the US’, build a wall across the border with Mexico and that climate change is fake. Is there any truth in what he is saying?

In my 2016 blog on Trump just after the announcement was made, I explained how the ‘banning Muslims’ statement had been taken off Trump’s website and that this was extremely unlikely to ever happen. However in a recent article by the independent, it said that following the Isis-related attack at a Christmas market in Berlin, Mr. Trump renewed his calls to carry out sweeping discriminatory acts against Muslims from overseas and the American Muslim population of around 3.3 million people. Does this mean that even the Mayor of London can’t visit the States? If this is the case, what has the world come to? Trump is arguably the most powerful man in the world, but the question is why are millions of people supporting him and his absurd views. How can we ban people from a country based on their beliefs. What’s next, skin colour, hair colour…?!

Of course, if he does go ahead and actually do it, the US will suffer economically as its Muslim community migrates, tourism falls and its popularity with other countries falls.

 

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As to whether he will build a wall, although it’s another outrageous idea, I believe that this is more likely as Trump has shown no signs of backing down from this one. As to whether Mexico will pay for this, I don’t think this is likely to happen. Firstly the cost of the wall could be upwards of $25 billion, something which Mexico simply cannot afford. Secondly, how can you force a country to pay for something they don’t even want. It simply doesn’t work.

 

4. Will China the Economic Powerhouse of the world continue to perform? Or could this lead

China currently represents about 40% of global economic growth, so if it heads into a recession, its effects will be felt by all, just like the 2007/8 financial crisis in the US and U.K. (caused by the subprime mortgages). Its effects rippled outwards and put the world in the greatest economic depression since the 1930s. China has a huge debt bubble and concerns of whether it can sustain its growth could lead to a bust.

I think it is unlikely that China could send the world into a depression similar to the one in 2008/9 but uncertainties with its housing market and whether or not it can sustain growth could impact the global market to some extent. Furthermore, China is the country Trump is mostly willing to pick a fight with, in 2017. Any significant trade disputes with the Chinese will be met with China lowering the value of its currency.

screen-shot-2017-01-15-at-21-44-02

 

The only thing we can really do is to wait and see what happens. I’ve discussed what I think is likely to happen based on my assumptions but others may believe something else based on their assumptions.

 

Sources used:

https://financialfablesandfacts.com/2017/01/03/the-top-10-economic-questions-for-2017-and-my-answers/

https://www.theguardian.com/politics/2017/jan/15/theresa-may-uk-is-prepared-to-accept-hard-brexit

http://www.independent.co.uk/news/world/americas/donald-trump-muslim-ban-registry-berlin-attack-twitter-you-know-my-plans-immigration-racism-a7489611.html

http://www.forbes.com/sites/kenrapoza/2016/12/19/china-bubble-economy-2017/#31c9a18f24b3

 

Stay tuned to rsira-economics.com to keep up to date with interesting economics news stories about current affairs and worldwide issues.

 

 

 

Should zero hour contracts be made illegal?

Hello readers, welcome back to my blog on interesting economics news stories of the week. Last week, I discussed why oil prices are so volatile and how oil in economics terms, has the power to start wars, transform countries from being poor to rich, cause inflation, as well as ‘fuel’ globalization and transportation across the globe. This week, I will be discussing whether or not zero hour contracts should be made illegal. As many of you will have seen in the news, there has been much controversy about these types of contracts and how damaging they really are on the lives of everyday people. Thousands of workers are complaining about how unfair it is not to be given guaranteed hours and many are worrying about paying bills each month and struggling to make ends meet. In fact, large established retailers such as sports direct have recently been in the news about this and their name has become perhaps the most associated with zero hour contracts in the UK. In addition to this Sports Direct was found paying workers below minimum wage. The BBC a few weeks back created a video where the image of Britain’s 22nd richest man, Mike Ashley CEO of sports direct arriving in a helicopter to work was juxtaposed with the image of thousands of workers in poor conditions, with low wages and unreliable hours.

screen-shot-2016-12-30-at-12-11-02

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Thankfully sports direct have responded to this and have decided to offer workers a guaranteed 12 hours a week. That being said 12 hours a week is not enough but at least it’s better than no work at all. The question now, is why don’t all retailers that still use zero hours follow in the same footsteps and should these contracts be made illegal by the government? Are there actually any economic benefits to zero hour contracts? And why do employers seem to like them so much?

In today’s post, I hope to be able to answer some of these key questions and explain the fundamental economics behind these contracts. I will try and keep it concise and to the point but include enough detail so that you become an expert on this topic. If you are intrigued to find out more, keep reading on and hopefully it will become much clearer to you. As always if you have any questions, please post them below and I will try to respond to them. Alternatively, you can send them directly to my personal email address-rajveersira@gmail.com

What exactly are zero hour contracts?

Before we get started, we might as well define what we mean by zero hour contracts and explain how fixed term contracts differ in contrast. Many of us may have heard the term but don’t actually know what the main differences are.

The fundamental difference is that zero hour contracts, don’t stipulate the number of hours staff should work. In other words one week you could be working 40 hours and another you could be working 0 hours, as employers aren’t obligated to offer any work at all in a given week. Equally, employees have the right to refuse any hours they’re offered if it does not suit them; however, the types of jobs involved in this sector are relatively low paid and often workers need all the hours they can get. Secondly, employees are only being paid for the hours that they work and not for sick pay or holidays and pensions. Workers in many cases are unable to take on other work, as they are obliged to be available for work at the drop of a hat. In addition, this high level of insecurity comes with the risk of bullying, and stress. Workers on these contracts don’t have the same employment rights as those on traditional contracts. Employers could even take advantage of zero hours workers by offering more work to favoured, employees and fewer to those less favoured and if employees refuse hours the employer is under no obligation to offer them future work.

According to the Office for National Statistics, more than 900,000 people in the UK claimed to be on zero hours contracts during the three months to the end of June, up 21 percent year on year. Sports direct used to employ 20,000 staff on zero-hours terms, although they have recently changed their terms. The Guardian also established that Buckingham Palace, the royal family’s London residence, hires workers using this method.

These figures are likely to underestimate the reality of the number of zero hour contracts out there, as it was found that many people do not even know they are on them!

So what’s the big deal then?

  • Workers are not able to’ bank’ on receiving a set amount of pay, making it difficult for them to plan their finances or to purchase ‘big ticket’ items like a house or a car.
  • This can create a number of health issues such as stress and anxiety. Wondering whether the rent can be paid this month or the grocery bill. These are just a few of the issues that workers on these contracts face every day.
  • According to some behavioural economists, ‘there is no doubt that the endless worry caused by economic uncertainty impedes the bodies immune system and consequently you get sick more’. It can also mean that people start making bad decisions and they are not as productive.
  • It is the taxpayer who is footing the bill to maintain an underpaid and exploited workforce
  • Working a zero hour contract means that you’ll miss out on benefits that full-time or permanent employees will get as standard, such as a pension and redundancy rights. This can leave you feeling extremely undervalued, especially if you are working to the same level as those with extra company benefits.
  • Constantly on-call – Not knowing when you’ll work can make you feel restricted, especially if you are balancing more than one job, or if you have other responsibilities such as picking the kids up from school.
  • Damaging to your social life – If you don’t want to miss out on work from your employer, you may find yourself waiting at home and turning down your normal social activities.
  • The rising costs of living caused by inflation together with no increase in wages mean that people’s real income has decreased. Being on a zero hours contract means that this effect is exacerbated, as there is no steady cash flow and you are unlikely to have savings to rely on.

 

Can zero hour contracts ever be good?

As with anything, there are almost always two sides to the situation and so yes there are actually a few benefits to these contracts.

In an article by the guardian, it said that: ‘they make perfect sense’. This is because “people get paid for exactly what they do, and for the time to do it. Anyone who questioned that principle is implying some of us should be paid for nothing. What’s more, in our dynamic and swiftly moving the economy, the number of hours that an employer requires can ebb and flow over a week, a day – even during a five-hour shift. Sometimes a bar, for example, might be heaving. Other times empty. It would be unreasonable on that basis to expect businesses to promise fixed hours to its workforce”.

The Article also said that: “Using zero-hours contracts is a way of offering a service – or offering a better or wider service – to consumers or other businesses without adding the significant fixed costs incurred by employing people on permanent contracts, or paying overtime, or incurring costs and administrative burdens infrequently recruiting and dismissing people in line with demand. In many cases, this would make the service commercially unviable. Zero hours contracts are therefore an essential tool for some businesses.”

Other benefits:

  • Flexibility – If you are faced with a request to work a shift that isn’t worth your while, then you can just turn it down. This pro can quickly turn into a con though if you consistently refuse to work and could put your zero hour contracts in jeopardy.
  • Free time – As you won’t be working long hours over the week you can use your free time for self-development. If you don’t have the necessary skills to pursue a new career or just want to learn valuable skills, which could lead you to a permanent job.

 

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Do they make sense economically or should they be phased out?

Zero hour contracts seem to be excellent for many employers, and good for students or workers who don’t like to have a fixed contract, although it is clear that for those who are struggling to find work and need a regular income this is a very damaging form of employment. As seen with sports direct workers have little control and they fear that if they do in a sense speak up for themselves they may not get any work at all. They are therefore being exploited by companies and I believe that they should be banned. How can someone who has a family and has regular bills to pay be expected to live on these contracts? It also makes employment stats misleading. We hear all over the media that the UK is at an all-time low, with unemployment at around 4.8%.This is actually misleading, as although people may be employed on paper, they are actually under-employed and this does not benefit the economy.

As mentioned earlier, they are actually costing the taxpayer more money from benefits and NHS dependence. The key success is employment whereby workers are paid decent wages as this will lead to higher living standards and reduced pressure on services.

In summary, I believe that the negatives associated with zero hour contracts simply outweigh the positives.

These contracts were outlawed in New Zealand in March 2016 and many campaigners would like that example to be followed here in the UK.

Here are some useful images which explore many of the ideas discussed this week:

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screen-shot-2016-12-30-at-12-11-47

 

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Sources used:

http://www.theweek.co.uk/58853/will-zero-hours-contracts-soon-be-a-thing-of-the-past

http://www.money.co.uk/guides/zero-hour-contracts-the-pros-and-cons.htm

http://www.bbc.co.uk/news/business-31859468

http://yorkshiretimes.co.uk/article/No-To-Zero-Hours-Contracts-Action-Against-Sports-Direct

https://www.theguardian.com/commentisfree/2015/sep/07/nothing-good-about-zero-hours-contract-abolish-them

 

Thanks for reading.  rsira-economics.com would like to wish you a very happy and prosperous New Year!