Author Archive | Tejvan Pettinger

Mansion tax – pros and cons

A mansion tax (or property tax) would be an annual progressive charged that would be paid by homeowners. It is effectively a tax on housing wealth. The Labour party has suggested implementing a property tax on homes worth over £2 million. Exact details have not been confirmed, but the suggestion is that it will be a progressive tax meaning the greater the value of the homes, the more the annual tax will be.

In 2010, the Lib Dems proposed a mansion tax based on 1% of a property’s value above £2m. This threshold would also rise in line with increasing house prices. In this case a property worth £2.5 million would pay an annual tax of £5,000 a year.

Proponents of the tax argue that it will help raise revenue, cool a booming property market and help to redistribute the great increase in wealth inequality that we have seen within the UK.

Critics argue that it could lead to people who are property rich, but income poor, struggling to pay the annual charge.

Benefits of a Mansion Tax

In recent decades, the UK has seen a dramatic increase in wealth inequality. House prices have risen above the rate of inflation making many homeowners much better off. But, those who cannot get on the property ladder are struggling with very high rents and an inability to get on the property ladder.

Wealth inequality UKSource: Wealth and Assets Survey – Office for National Statistics

A report by the ONS shows that there is considerable wealth inequality within the UK.

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UK Social security budget

A look at how much the UK government spend on social security, benefits and welfare payments.

Note. I found it very difficult to find stats on how much the government spends on various benefits. The most helpful places were.

Headline stats

Total public spending 2013/14 – £686 billion.

  • Social security budget- £251 billion 37% of 2013/14 spending
  • State pensions account for £83 billion
  • Welfare spending of £168 billion or roughly 25% of budget
  • Benefit spending – of the £205 billion or so spent on tax credits and social security benefits, the IFS calculate about £111 billion is spent on those over pension age and £94 billion on those of working age.
  • Source: welfare spending at IFS

Benefit spending in the UK

The only breakdown I could find of benefit spending was from this Guardian data doc. Using original data from the Department of Work and Pensions .

 

Welfare benefits (billion, bn)

  • Housing benefit    £16.94
  • Disability allowance    £12.57
  • pensions credit +MIG    £8.11
  • iIncome support    £6.92
  • Rent rebates    £5.45
  • Attendance allpwance    £5.30
  • Incapacity    £5.30
  • Jobseekers allowance    £4.90 (0.7% of total spending)
  • Council tax benefit    £4.80
  • employment + Support    £3.58
  • sick + maternity pay    £2.55
  • Social fund    £2.37
  • carers allowance    £1.73
  • financial assistance    £1.24
  • Total £159

 

uk-welfare-payments

Main groups of welfare payments

  • State pensions    £74.22
  • housing benefits    £27.20
  • Disability benefits    £24.80
  • low income    £17.40
  • Jobseekers allowance    £4.90
  • others    £9.60
  • total    £159

Where:

  • housing = housing benefit + rent rebate + Council tax benefits
  • disability = disability allowance, incapacity benefit, carers allowance
  • low income support – pensions credit, minimum income guarantee, social fund

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Housing benefit in the UK

Readers Question: There are around 22 million households in the UK, 2/3 of whom own their house.
So the rental market would be around 7 million of whom one million receive benefit, some portion living in social housing, some in private rented housing. Does that seem reasonable? Can you point me towards actual numbers?

In August 2014, 4.93 million received housing benefit, at an average weekly payout of £93. This gives a rough annual cost of £23 billion. Dept Work and Pensions

What is housing benefit?

Housing benefit is a means tested benefit paid to the unemployed and low paid to help with the cost of rent. For a family living in a large four bedroom house – housing benefit can be up to £400 a week. (Housing Benefit.gov.uk)

The aim of housing benefit is to help those on low income afford their housing costs.

  • It is particularly important for areas of high housing costs, such as London. Without housing benefit, there would likely be a shortage of workers because people would have to move away to cheaper areas.
  • Housing benefit helps to reduce inequality and relative poverty by helping people with their major living costs.
  • Housing benefit can help avoid homelessness by giving people help with housing costs.
  • Housing benefit can be claimed with other benefits, such as unemployment benefit and tax credits.

Whether you are eligible and the amount you get is determined by a local authority housing allowances (LHL)

Number claiming housing benefit

housing-benefits-number

Housing Benefit case load statistics Dept Work and Pensions

Source: Single Housing Benefit Extract (SHBE), via Stat-Xplore

Of this 4.93 million

  • 1.28 million are over 65.
  • 468,000 are receiving job seekers allowance
  • 3.3 million are in the social rented sector. 1.6 million are in the private rented sector
  • The biggest area for receiving benefits was London with 835,000.

The great recession of 2008-2014 saw a marked rise in the numbers eligible for housing benefit. The numbers claiming housing benefit peaked at just over 5 million in early 2014. In Aug 2014, 4.93 million received housing benefit.

The rise in numbers claiming housing benefit is due to factors such as:

  • Fall in real wages causing more people to be eligible for income related means tested benefits.
  • Rise in unemployment during the great recession, which significantly reduces income.
  • Rise in cost of renting during this period.

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What does the government spend its money on?

Readers Question: What does the Government spend its money on?

The government spends money for a variety of reasons:

  • Reduce inequality (welfare payments like unemployment benefit).
  • Provide public goods (fire, police, national defence)
  • Provide important public services like education and health (merit goods)
  • Debt interest payments.
  • Transport
  • Military spending

UK public sector spending 2014-15

UK-government-spending

In the UK, the biggest department for public money is social security. This takes  almost a quarter of all public spending. It goes on financing a variety of benefits (State pensions, public sector pensions, housing benefits, income support, disability / incapacity benefits, unemployment benefits).

Main Areas of Government Spending 2015

  • Public Pensions       £150 billion
    • Sickness and disability £40bn
    • Old age pensions £107bn
  • National Health Care       + £133 billion
  • State Education       + £90 billion
    • Secondary education – £25bn
    • University education – £11bn
    • local education spending – £48bn
  • Defence       + £46 billion
  • Social Security       + £110 billion
  • State Protection       + £30 billion
  • Transport       + £20 billion
    • Railway – £5.2bn
    • Roads – £3bn
    • Local transport – £9bn
  • General Government       + £14 billion
    • Executive and legislative – £5.9bn
  • Other Public Services       + £86 billion
    • Social housing – £1.2bn
    • Waste management – £9bn
  • Public Sector Interest       + £52 billion

Cost of EU

  • Gross payment to EU – £17.2bn
  • Net payment to EU – £8.6bn
  • FT – EU cost

Total Spending       = £731 billion

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Is the younger generation worse off than their parents?

Readers Questions: is this the worse time to be a young adult in the UK?

I will answer this question primarily from the economic point of view.

The first thought that springs to mind is that if you look at the long history of the UK, this is probably a good time to be young in the UK.

real-gdp-growth-55-14

Median incomes are close to an all time high (even despite the fall since since the 2008 crisis), educational opportunities are arguably better than before (even if more expensive), unemployment is relatively low and likely to fall (even if there is greater insecurity in the new job market).

It is always tempting to think that every thing was rosy in the past. But, living standards have consistently risen in the past few decades. It is true, that for the past five years, real incomes have stagnated even fallen, throwing into greater contrast rising living costs, especially housing. However, were the previous generation really better off?

Economic problems facing young people

There are several reasons to be concerned about prospects for young people.

Firstly, housing is a real problem. There is a serious shortage of affordable housing – especially in London and the south. This means that many young people simply can’t afford to buy a house like their parents generation could. Home ownership rates are falling – especially amongst people under 30.

house-price-income

House prices are rising faster than incomes. See more at UK housing market stats – including house price to income ratios. For many young people, buying a house is just an impossibility.

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UK Inflation Rate and Graphs

Current UK Inflation Rate

  • CPI inflation rate: 1.3% (headline rate)
  • CPIH – 1.3% in the year to Aug 2014
  •  (page updated 18 November, 2014)

monthly-inflation

 

CPI and CPIH

CPIH is a new experimental index from the ONS. It is based on CPI, plus it includes housing costs, such as mortgage interest payments. Owner occupiers cost (OOH) account for 12% of the CPIH weighting. Mortgage interest payments are the biggest part of OOH. Mortgage interest payments average 10% of household expenditure.

cpi-cpih-inflation

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Japanese National Debt

Readers Question: How is Japan able to run a national debt of nearly 240% of GDP? (from: List of National debt by Country)

In 2013, Japanese public sector debt rose to one quadrillion yen ($10.28 trillion). In 2013, this was 227% of GDP. This is significantly more than several European countries like Greece (150% of GDP, Italy 112% of GDP, UK 77% of GDP).

In the most recent budget deficit, Japanese government borrowing accounted for 7% of GDP.

Source: Hoshi and Ito (2012).

Despite the record debt levels, bond yields on Japanese debt are very low. Why is Japan able to borrow so much? Why have interest rates on Japanese bonds fallen?

Why Japan is able to borrow?

 

Why Japan is not Greece

Why Japan is not Greece: Source Beacon Reports on Japan

Current account surplus. Japan is running a current account surplus – attracting capital inflows into Japan; these  can be used by the private sector to buy government bonds. Japan doesn’t rely on external financing of its public sector debt. A high percentage of Japanese public sector debt is held domestically. 70% is held by the Bank of Japan, most of the rest is held by Japanese trust and investment funds. Despite a temporary inflow after the Euro debt crisis, foreign sector holdings of of medium- and long-term Japanese government securities remained below 7%. (Vox).

By contrast European periphery countries like Spain, Greece and Italy were also running current account deficits and had a greater reliance on external financing of domestic debt.

The Japanese private sector (both household and corporate) have a large appetite for buying government bonds. This is because domestic savings are relatively high. People and firms have spare cash to buy bonds and lend the government money. In a country with a very low saving rate, there would be less people willing / able to buy government debt. One concern that Japan has is that the domestic savings ratio is expected to continue to fall due to demographic changes. (See: Japan savings ratio)

Cost of debt servicing. Interest rates and bond yields in Japan are very low. (10 year bond yield is 0.5%) Therefore, the interest payments on the debt are relatively low. If interest rates in Japan were to rise, the cost of servicing the national debt would be much higher. Still debt interest payments account for a substantial amount of government spending. (15% of GDP, according to World Bank)

Japan has very low inflation and interest rates. The Bank of Japan is able to monetise part of the debt without causing inflation because of the depressed state of the economy. 70% of government debt is held by the Bank of Japan, which in theory doesn’t need repaying in the same way as to domestic savers. Adjusting for effects of tax, the nationwide core consumer-price index rose 1.0% in September, 2014 (WSJ). Analysts fear inflation could fall to 0.5% in 2015. A higher inflation rate would help the Japanese economic recovery.

Japan is still vulnerable – if the current account surplus falls, the external surplus will diminish reducing domestic purchase of government bonds.

If interest rates rise, the cost of financing the deficit will rise – though if interest rates do rise, this will hopefully be a reflection of an improving economic cycle, leading to higher growth.

In recent years, the Japanese government has been caught between trying to increase tax rates and increase the rate of economic growth. Unfortunately, they conflict. But, if Japan is to see a fall in debt to GDP ratio, then strong economic growth is a necessity.

 

Related

The failure of quantitative easing?

Readers Question. Just saw a video called ‘How to waste £375 billion? (The Failure of Quantitative Easing)’ by Positive Money. I’ve recently started reading your blog and find your posts very informative. I wonder what you make of the ideas in this video and of this group in particular?

(I haven’t seen the video. For some reason I never like watching videos only reading articles.)

I would say Quantitative easing has been a quantified success. Or perhaps a better way of evaluating quantitative easing is that – it could have been worse, if we hadn’t pursued quantitative easing.

A simple comparison is to compare the UK and US (who have both pursued quantitative easing) with the Eurozone (which hasn’t). In the past couple of years, the economic recovery has been stronger in the US and UK, the Eurozone is in danger of a double dip (or triple dip) recession. The Eurozone is heading towards a dangerous period of deflation. The UK and US have at least a better inflation rate.

Eurozone inflation

eurozone inflation

Therefore, I wouldn’t say we wasted £375 billion. Firstly, ‘wasting’ implies an opportunity cost – for example, finding it from higher taxes or lower spending. It was entirely created. For all its faults and limitations, the quantitative easing we pursued was better than nothing – especially given the degree of fiscal tightening pursued since 2010.

Problems with UK Quantitative easing

Perhaps a better description of UK quantitative easing is a wasted opportunity. True, we avoided some deflationary effects, but there are reasons to be disappointed and perhaps it could have been better.

Banks largely used the newly created money to make a profit from selling bonds to the Bank of England and improve their balance sheets; because of the recession, little of this extra money fed through into the real economy through higher bank lending (see: M4 lending stats). The side effect was some banks and the bond market did very and interest rates are at very low rates. True, low rates are part of the aim behind Quantitative easing, but low interest rates are of limited benefit, if firms are unable / unwilling to borrow and make use of cheap borrowing.

Parts of the financial services industry has benefited very well from quantitative easing. It is perhaps a little galling to see many of those culpable for aspects of the credit crisis gaining bonuses from the benefits of quantitative easing.

However, to say it solely benefited the rich is to ignore the contribution it may have made to reducing unemployment. UK unemployment has fallen for many reasons – the small economic stimulus is an important factor – never forget reducing unemployment is one of the most important factor in reducing relative poverty. The UK unemployment rate is now 50% lower than many areas in the Eurozone.

Who benefited from quantitative easing?

Printing money to fund government deficit

Would a better form of quantitative easing have been to print a smaller amount of money, but directly use this to finance government budget deficit, and / or fund public sector investment?

Some argue this would have directly led to higher demand and a stronger economy.

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Dutch disease

The Dutch disease refers to the problems associated with a rapid increase in the production of raw materials causing a decline in other sectors of the economy. When the raw materials run out, the economy can be in a worse position than before.

oil-field

oil field in Azerbaijan by Ken Douglas

– Can discovery of substantial raw materials be a curse in disguise?

If a country discovers substantial amounts of oil, gas or other natural commodity, it will begin to export these goods causing a substantial increase in GDP; this will improve tax revenues, improve the current account and create employment opportunities. But, often countries who discovered oil have gained much less than you might expect.

These are the likely economic effects of discovery oil / gas.

1. Appreciation in currency. Due to the discovery of oil and increase in exports, the country will see an appreciation in the exchange rate. This is because higher demand for exports lead to increased demand for Sterling. For example, in the late 1970s, the UK saw a rapid appreciation in Sterling after the discovery of North Sea oil.

2. Decline in competitiveness. The problem of this appreciation in the exchange rate is that other trade-able sectors of the economy will become uncompetitive. Manufacturing industries will see a substantial fall in demand, due to the higher exchange rate. Therefore, the economy will shift from manufacturing towards the primary sector. In the early 1980s, UK manufacturing output fell significantly as a result of the appreciation in the Pound.

3. Growth in luxury imports. Higher output of oil will enable those who benefit to spend on luxury goods and luxury services. These luxury goods tend to be imported meaning that domestic firms gain little benefit.

4. Growth in real wages. Due to the increased wealth and spending on services, there will be higher demand for service sector workers (waiters, hairdressers, chauffeurs e.t.c). This will cause rising real wages in the economy, causing another problem for manufacturing firms as they have to increase real wages to retain workers. This will further decrease competitiveness of manufacturing exports.

5. Indirect-deindustrialisation. With manufacturing becoming uncompetitive due to higher exchange rate and higher wages, output will fall, and there will be a decline in investment, leading to lower growth. These sectors will begin to lag behind other countries. It can be very difficult to catch up later.

5. Income inequality. Often the discovery of raw materials, such as oil benefits a relatively small percentage of the population. Those who own the oil fields can see huge wealth, but the benefits of oil and gas are often not equally distributed within society. Workers may benefit from rising real wages in the service sector, but the discovery of raw materials often creates a few billionaires, so the increase in GDP is often concentrated in the hands of a small number. In several developing economies, oil fields are developed by foreign multinationals, causing some of the wealth to be taken away from the country. Continue Reading →

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The battle for market share in UK supermarkets

The UK grocery market has become increasingly competitive in the past few years. It is a good example of an oligopoly becoming more competitive. Certainly the growing strength of discount giants like Aldi and Lidl have really shaken up the market and diluted the cosy oligopoly previous enjoyed by the likes of Tesco and Sainsbury. To further add interest, Pound shops are also gaining market share and nibbling away at the margins of the big supermarkets. For consumers it is largely good news with lower prices, lower profit margins and a raft of incentives from supermarkets trying to hold onto market share.

Supermarket share 2014

uk-supermarket-share

 

The big three – in particular, Tesco and Sainsburys are suddenly having to pull a halt to ambitious expansion plans and in Tesco’s case have been left red faced by profits falling short of profit forecasts.

Why are Supermarkets becoming more competitive?

The supermarket industry is fairly contestable. There are few limits to opening a new superstore. Also, the shift to smaller, local convenience stores has made it even easier to set up new local supermarkets – rather than big, out of town supermarkets.

It is true there are significant economies of scale in purchasing, distribution and marketing, but even a relatively small supermarket chain like Lidl / Aldi seem to be able to exploit great economies of scale from their relatively small market share. It is not like the car industry where the minimum efficient scale is a much bigger share of the market.

In the case of Lidl and Aldi, it is very successful European supermarkets bringing their model to the UK. They both have a strong track record of taking on bigger, higher margin supermarkets and attracting customers from a wide range of social backgrounds – attracted by very low cost goods. In 2014, Aldi has achieved its highest ever growth of 35.3%, increasing its market share to 4.6%. It is planning to open another 60 stores in 2015

supermarket-growth

Falling real incomes

The past few years have been particularly tough for the hard pressed British consumer. In the past few years, inflation has consistently been higher than nominal wage growth - causing the most persistent fall in real incomes since before the war. In such straightened times, it is unsurprising that consumers have become more sensitive to price, seeking out bargains in Pound shops and budget, no-nonsense supermarkets like Lidl. The great recession, is not a good time for supermarkets like Sainsbury and Tesco who have relied on a higher price markup. Continue Reading →

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