Political Manifestos 2017

Hello readers, welcome back to my blog. Given the significance of some of the content in last week’s releases of political manifestos, I thought it would be a useful exercise to analyse some key issues that emerged from this and, ultimately, look at the economic theory behind these. I will focus on just two parties- labour and conservatives and will compare and contrast different policies as well as use some figures to support the arguments. I hope to summarize and present the key points from these two parties so that by the end of reading this you are aware of what Mrs. May and Mr. Corbyn are planning to do.

 

The Labour Party:

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Scrap Tuition Fees:

  • Labour says it will bring forward its pledge to scrap tuition fees to include students starting university in England this autumn if it wins the election. The party also says students partway through their courses would not have to pay for the remaining years. It said the cost was factored into the £9.5bn annual bill for scrapping fees.

Evaluation:

  • The Tories said more poorer students than ever were going to university, and that there are already suitable bursary schemes in place for those on low incomes.
  • Labour said the £9.5bn annual cost of abolishing tuition fees would be paid for by increasing corporation tax, and income tax for people earning over £80,000.

 

Increasing Taxes:

  • The 50p income tax rate will be introduced at a threshold of £123,000, while those earning more than £80,000 will be subject to a 45p rate, raising an additional £6.4bn from high earners.

Evaluation:

In theory, higher taxes will help reduce income inequality and will reduce the gap between rich and poor. However, higher taxes could lead to a greater incentive to evade them and may reduce the incentive for people to work harder and work their way to the top since they don’t want to enter the next tax bracket. This can worsen productivity, which is already low in the UK.

 

Workers Rights and Democracy:

  • Day-one rights
. Labour would give all workers equal rights from their first day of employment, regardless of whether they were full-time or part-time, permanent or temporary.
  • No more zero hours contracts
. The party would ban zero hours contracts, guaranteeing every worker a minimum number of paid hours. Labour would also strengthen the law so that those who work short hours for more than 12 weeks on a regular basis will have the right to a regular contract, which reflects those hours.
  • Post-Brexit employment rights and foreign workers-
Labour would legislate to ensure that employers recruiting workers from abroad do not undercut workers at home. Corbyn has also pledged to replace the proposed Great Repeal Bill with the EU Rights and Protections Bill, which would safeguard workers’ rights handed down from the EU.
  • A new living wage for all
. Labour says it will raise the minimum wage to the level of the “Living Wage (expected to be at least £10 per hour by 2020)”. This would apply to all workers aged 18 or over.
  • No more unpaid internships
  • Abolish tribunal fees
  • Double paid paternity leave
  • Lowering the voting age to 16.

Evaluation:

Banning zero hour contracts, although may increase job security for many people can be damaging to others where a zero hour contract is ideal. E.g. someone who wants to choose when and how much they want to work, like a student or part time parent and thus what might be more effective is stricter controls on such contracts rather than a complete ban. Labour has also provided some clarity as to what will happen to EU workers as a result of Brexit.
Labour has also announced that if it did win the general election it would raise the minimum wage to at least £10 by 2020. Although this means that people receiving minimum wage would see an increase in their disposable income and may perhaps have a higher incentive to work more hours, it could actually lead to unemployment if firms and businesses cannot afford to pay their workers this amount. This would be an unintended consequence and if businesses did start to lay off workers it would increase the demand for Job seekers allowances and unemployment benefits, therefore, costing the taxpayer more.

One other point is that labour has stated that it will double paternity leave pay. Although this benefits the individual again, it would mean that businesses would face higher costs and this may result in them increasing their costs to compensate for this. It could also lead to discrimination in the workforce, as businesses may choose someone who is not likely to go on leave than someone who is.

 

Health:

  • Deliver safe staffing levels and reduce waiting lists
  • End hospital car parking charges
  • One million people will be taken off NHS waiting lists by “guaranteeing access to treatment within 18 weeks”
  • Scrap NHS pay cap
  • NHS will receive more than £30bn in extra funding over the next parliament
  • Mental health budgets will be ring-fenced, and Labour will ensure all children in secondary schools have access to a counseling service.

Evaluation:

Increased spending on the NHS means a tax rise is inevitable and middle/upper-class households will be affected most. Although it may seem fair to tax the rich not everyone in this category can afford these increases in tax unless they undergo significant lifestyle reforms.

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The Conservative Party:

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Education:

  • Pump an extra £4bn into schools by 2022
  • Scrap free school lunches for infants in England, but offer free breakfasts across the primary years.
  • End ban on grammar schools – conditions would include allowing pupils to join at “other ages as well as eleven”

Evaluation:

Scrapping free school lunches is controversial as young children are the ones being affected since families may not be able to give their children money for lunch.

 

Health:

  • Real terms increases in NHS spending reaching £8bn extra per year by 2022/23
  • A new GP contract and changes to the contract for hospital consultants
  • Retain the 95% four hour A&E target
  • Require foreign workers and overseas students to pay more to cover the cost of NHS care.

Evaluation:

Even with this additional money, the NHS will have to find unprecedented levels of efficiency savings within five years just to break even.

 

Migration and Brexit:

  • Exit the European single market and customs union but seek a “deep and special partnership” including comprehensive free trade and customs agreement
  • Vote in both Houses of Parliament on “final agreement” for Brexit

Evaluation:

Theresa May admitted a few weeks back that the first set of negotiations were not as successful as she had hoped. There is still uncertainty as to where the UK is headed in terms of trade agreements.

 

Defense:

  • A pledge to spend at least two percent of GDP on defense and increase the budget by at least 0.5 percent above inflation in every year of the new parliament.
  • A pledge to “maintain” the overall size of the armed forces, retain the Trident continuous-at-sea nuclear deterrent.

Evaluation:

Corbyn, on the other hand, has said that: “I want to achieve a nuclear-free world through multilateral disarmament, through the nuclear non-proliferation treaty.” He believes that the money spent on nuclear defense is unnecessary and what is needed is more money into the NHS and local police forces.

 

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Sources used:

http://www.bbc.co.uk/news/election-2017-39955886

https://www.conservatives.com/manifesto

http://www.labour.org.uk/index.php/manifesto2017

http://www.telegraph.co.uk/news/0/at-a-glance-key-points-leaked-labour-manifesto/

 

What are the macroeconomic impacts of Brexit?

Hello Readers, welcome back to another edition of rsira-economics.com. Last time you might remember me discussing a number of key economic concepts that are vital to economists and the understanding of the world in which we live in. This week, I will be going back to discussing current economics news and I will be focusing on perhaps the most controversial issue looming over our minds at the moment. Brexit. With the announcement by Theresa May to trigger article 50 and the recent call for a general election on the 8th June, so much has happened since my last Brexit post, further demonstrating how economics is such a fast moving subject which is all around us. It is important that we actually understand some of the implications of Brexit and where Britain stands economically, particularly on the macro side. In this post I hope to summarize the situation so far, and discuss the macroeconomic impacts on the UK of leaving the EU and the single market which is likely if the Conservative government stays in power, as they have announced that they will be going for a hard Brexit, or as May’s government prefers to talk of a “clean” Brexit.

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Let us first consider some of the short-term impacts that Brexit has had on the UK economy so far:

  1. Demand-Side Shocks

Before the referendum last June, many economists produced gloomy forecasts, which have since been proved wrong. Consumer confidence has not suffered, and by and large, things have gone on as before. However we must remember that the UK has not actually left the EU yet – the real change may only happen once it does. Business confidence, however, has been affected and current uncertainty, ahead of talks between the UK and the rest of the EU, over what form Brexit will take is an issue for many firms when it comes to investment planning. Many firms have made the decision to defer investment projects until the situation becomes clearer and others such as HSBC have made decisions to relocate jobs to Europe to ensure any connections with Europe are not severed.

If when Brexit does actually happen, and people start to become concerned (lower animal spirits) about the future of the UK, leading to a potential fall in demand for goods and services, there is not much room for the Chancellor to stimulate aggregate demand since the base rate of interest is already close to 0. Although some central banks have experimented with negative interest rates in order to stimulate the economy in the past few years, this is not something that has been widely discussed in the UK and is itself a topic for another post.

  1. A weakening exchange rate and Inflation

The pound fell dramatically after the Brexit vote last year, and since then has been trading around 15% lower compared to the dollar and 12% lower compared to the euro than it was before the referendum. The fall in the pound has helped British exporters but it has made foreign holidays more expensive for British tourists, as well as made imports more expensive. Since Britain is a net importer, this is particularly damaging and Britain could suffer from imported inflation. The UK’s fall against the dollar was of particular concern as oil is priced in US dollars and thus the cost of importing oil has risen, leading to issues with production and transport costs. JP Morgan Asset Management is projecting that CPI inflation will rise to 3 or 4 % by the end of 2017, beyond the bank of England’s target 2.0.

 

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It has also increased import costs for manufacturers, which is a key factor for sectors such as the car industry, where vehicles which may be completed in the UK often have imported component parts.

The prolonged weakness of the Sterling could lead to speculative selling of the currency and although unlikely, a collapse in its value. Such a crisis could lead to the Bank of England having to raise interest rates sharply to try and encourage investors to hold the currency, however rising interest rates could restrict demand and inflict more damage to GDP.

 

The long-term effects on the UK:

Currently, the UK is a member of the European Union meaning that there are no tariffs for trading with other EU members, although in return countries have to allow for the free movement of people, within the European Union. However, Theresa May has said that we can no longer be a part of the EU single market as the primary reason for voting for Brexit was to control immigration. It is very unlikely that from the negotiations so far that Britain could have access to the single market and its own immigration rules as this would be unfair to other countries who would also demand similar rules or even worse have their own ‘Brexit’. Without the single market, it would mean that trade restrictions, taxes, and tariffs would have to be implemented on Britain’s exports.

In economic theory, trade restrictions are damaging as tariffs raise prices and reduce consumer surplus. The average tariff on non-agricultural goods exported to the EU was 2.3% and since 44% of all UK exports goes to the EU, there is scope for some serious damage, as the price of UK goods when sold in the EU would be raised relative to the price of goods produced within the EU. Furthermore, tariffs on some products that the UK exports most successfully are higher, for example, cars at 10%.

On the flipside, such trade destruction could be offset by the UK diversifying its trade partners with non-EU member countries, since at the moment the single market encourages the UK to stay in this confined network. However, 44% is close to half of UK exports and this alone brings in billions for the country meaning it is a huge risk to take.

Others argue that the EU membership fee could be spent elsewhere such as on the NHS, although this is such a small percentage of the amount the EU generates for the UK economy.

  1. Growth and Security

David Tinsley of UBS projects that long-run UK GDP could be around 3% lower in a scenario where UK access to the EU market is severely restricted. This would put Britain further behind other countries such as Germany and America. It has also been suggested that without the EU, Britain would be vulnerable and not as safe as it would be with the power and scale of the EU. Further, many people for Brexit suggested that Britain could make its own rules if it was no longer part of the EU, however, some of these rules have been established for years and disrupting the system could only make things worse.

 

  1. Loss of Foreign Direct Investment (FDI)

In 2015 the UK was the third largest recipient of FDI primarily because the UK acted as a ‘gateway to the EU’ in the sense that goods produced here can be exported to the EU free of tariffs and with relatively low transport costs. There are of course other factors making the UK attractive such as a flexible labour market but losing access to the EU single market is likely to lead to a reduction in FDI. George Osborn, in his last act, cuts corporation tax to 15% to attempt to maintain the UK’s attractiveness as a hub for business.

 

  1. Reduced Inwards Migration

This was perhaps the ultimate driving force behind Brexit since the large-scale inwards migration mainly from Eastern European countries where wages are lower and living standards relatively poorer, gave the British people the impression that it was time to “take their country back”. Migration actually adds to the labour resources of the UK economy thus increasing its productive capacity, an important determinant in long run economic growth. Economists for Brexit have argued that we could move to a points based immigration system instead, only allowing those with high skill levels to gain admittance to the UK. Although this would ensure that we do not rule out immigration altogether, what about all the low skilled labour which is largely being provided by this inward migration from Eastern Europe. Furthermore, British workers have on numerous occasions been proved to be less productive when placed in the same low-skilled jobs and farmers, restaurants and factories would face huge inefficiencies if this channel of workers was blocked off.

 

Conclusion

Whilst economists are unable to say with certainty what the true impacts of Brexit will be, it is clear that Brexit has and will continue to cause uncertainty and disruption which is damaging to the UK economy. In the months after the referendum, a poll from the Observer stated that 88% of economists felt that Brexit would damage the prospects for the UK economic growth over the next five years.

Although Theresa May has said that Brexit means Brexit and that article 50 has been triggered, if Liberal Democrats were to win the general election, they could actually call for a second referendum, meaning the UK could still remain in the EU and part of the single market. The President of the European Parliament has said Britain would be welcomed back with open arms if voters changed their minds about Brexit on 8 June. This directly contradicts Theresa May’s claim that ‘there is no turning back’ after Article 50. Liberal Democrat Leader Tim Farron said: “This shows it’s not too late to prevent a divisive, hard Brexit. “On 8th June, together we can change the direction of this country. “The Liberal Democrats will be the real voice of opposition to this Conservative Brexit government.”

 

Sources Used:

http://www.bbc.co.uk/news/business-36956418

Economics Today Volume 24.

http://www.libdems.org.uk/brexit-can-be-overturned-this-is-your-chance

https://www.forbes.com/sites/francescoppola/2017/04/30/the-uk-government-is-completely-deluded-about-brexit/#68e9e6f54f04