Archive | economics

Reducing medical costs in US

Readers Question: The recent issue of health insurance coverage (the fact that everyone must have it or pay a penalty, and that this is causing everyone’s premiums to go up) has me wondering: why can’t the U.S. simply lower overall costs of everything, not just health insurance, but medical treatment costs, as well as all costs of living/all merchandise of any kind, but not lower anyone’s wages? 

Yes, the US could reduce health care costs as a % of GDP without lowering wages and with only a minimal effect on health care standards.

The US spends more on health care than anywhere else in the world.

total health care spending - list of countries

Note, this is health care spending per capita – and the US has one of the highest per capita incomes in the world.

US vs British health care

For all the money the US spend on health care, there isn’t a significant improvement in living standards.

% of health care spending as % of GDP Govt spending as % of total health care Per Capita expenditure 2006 (PPP) Doctors per 10,000 population Nurses / midwives per 10,000 Hospital beds per 10,000 Life Expectancy male obesity
UK 8.2 87.3 2815 23 128 39 80 22%
US 15.3 45.3 6719 26 94 31 78 31%

US health care costs were 7% of GDP in 1970. UK was 4% of GDP in 1970 (Runaway health care costs) Health care costs have been rising very fast in the past few decades. Aspects of the way private health care insurance is set up means this is more likely.

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UK Population trends and forecasts

Since 1964 the population of the UK has grown by over 10 million people (18.7%).  About 50% of this growth has occurred in the past 15 years.


UK-population-change. Source: ONS Population

In recent years, the rate of population growth has exceeded 0.6% a year.

UK population predictions


The biggest population growth is predicted in England, and the south east especially.

Population forecasts for UK

2008 2033
UK 61,393 71,623
England 51,460 60,715
Wales 2,990 3,347
Scotland 5,169 5,544
N.I 1,775 2,016

What is causing the growth in the population?

main-drivers-population-change_tcm77-368323 The main cause of population growth in the UK are:

  • Improved life expectancy
  • Net migration

In 2013, net migration was accounting for roughly half of the population growth.

  • In the year ending June 2014. There was net migration of 260,000. Of which just less than half was from the EU (142,000) and the other (168,000) from outside the EU

Birth rate in UK

  • There were 698,512 live births in England and Wales in 2013, a decrease of 4.3% from 729,674 in 2012.
  • In 2013, the Total Fertility Rate (TFR) decreased to 1.85 children per woman, from 1.94 in 2012


The fertility rate of 1.85 per women is higher than many European countries, such as Germany where it is as low as 1.35.

Impact of improved life expectancy

With increased life expectancy being a major driving force of rising population, we will see a significant increase in the number of people over 65. The number of people over 65 will increase from 16% of the population in 2008 to 23% of population by 2033.

In particular, there will be a significant increase in the number of very old 90+, 100+

Graph showing change in age profile of UK


Net migration is a factor in the increase in working age population demographics.

Rise in one person households

Another factor in the rising population is that there will be a proportionally bigger percentage increase in one-person households. Therefore, the number of households will rise faster than the population.

UK Population Households



Some economic implications of rising population

  • Increasing demand for housing – both to buy and rent. However, the UK finds it difficult to increase supply. Local pressure groups often resist building of houses on greenbelt land. Therefore a long term forecast for house prices would be upward.
  • Tax revenue. A rising population will make it easier for the government to deal with an ageing population. The UK faces less of a demographic shift than other European countries such as Italy. The burden on pensions and health care will be less than in other European countries
  • Transport. Combined with economic growth, an increasing population will lead to significant increase in demand. Yet, the capacity to increase road space is limited. This is part of government’s rationale for high speed rail travel.
  • See more at: economic impact of rising population

A rising population has both benefits and costs. One big dilemma will be how the UK deals with transport congestion.

Historic population growth

1801 – population of Great Britain was 10.5 million
The population of England doubled from 16.8 million in 1851 to 30.5 million in 1901


Trickle down economics

Trickle down economics is a term used to describe the belief that if high income earners gain an increase in salary, then everyone in the economy will benefit as their increased income and wealth filter through to all sections in society.

However others criticise this belief that if the top earners in society gain an increase in income, everyone benefits as a result. Some studies suggest that increased income inequality can lead to this inequality being solidified through educational opportunities, wealth accumulation and the growth of monopoly / monopsony power. Furthermore, increased inequality may lead to lower rates of economic growth.

A recent report by the OECD found that since the start of the credit crisis in 2008, inequality has widened in many countries; however this inequality has led to lower rates of economic growth not higher.

This graph from an OECD report suggests that inequality is responsible for lower GDP. The OECD estimates that the UK economy would have been more than 20% bigger had the gap between rich and poor not widened since the 1980s.


Source: OECD Focus – Inequality and Growth 2014

Trickle down effect and tax cuts

An important element of the trickle down effect is with regard to income tax cuts for the rich. It is argued that cutting income tax for the rich will not just benefit high-earners, but also everyone. The argument is as follows:

  1. If high income earners see an increase in disposable income, they will increase their spending and this creates additional demand in the economy. This higher level of aggregate demand creates jobs and higher wages for all workers.
  2. Alternatively, increased profits for firms may be reinvested into expanding output. This again leads to higher growth, wages and incomes for all.
  3. Lower income taxes increase the incentive to for people to work leading to higher productivity and economic growth. Continue Reading →

Does the UK have a housing bubble?

Readers Question: Do you think the help to buy scheme is fuelling a housing bubble? Only about 3% of houses are bought through this method but do you think that it is likely that a bubble will develop?

In a way, I think you answer the question yourself in stating that only 3% of houses are bought through this method

With such a small percentage of homes bought through this scheme, it is not going to be a major cause of a housing bubble; however, in a relatively significant way, it will add to housing demand. Given the inelastic nature of housing supply, it will make a contribution to pushing up house prices.

Without the help to buy scheme would people have bought houses anyway? I’m not sure. I think the scheme will definitely help some to get a mortgage, and therefore buy rather than renting. In that regard it is adding to housing demand, and therefore pushing up prices, but only a small amount.

Will a housing bubble develop?

This is a more difficult question. There are different types of housing bubbles.

One is the housing bubble experienced by US, Ireland and Spain – where property prices rose substantially above average earnings, and then fell by up to 50%. This is because house prices in these countries became divorced from the fundamentals of housing supply and demand. When the mortgage market experienced difficulties, demand fell and prices fell significantly. The crucial thing about US, Ireland and Spain was that after the housing bubble and bust, there was a large excess supply of housing. Therefore, when demand fell, prices fell considerably.


See: Ireland Housing bubble and bust

The UK housing market behaved differently. When demand fell in 2007/08 because of the credit crunch, prices did drop by 20%. But, house prices stabilised much quicker, and then – defying many predictions – began to rise quite rapidly. Meaning that in the UK, house prices in many areas are higher than before the crash.

The main difference is that in the UK, there was no excess supply of housing; there was no boom in home building. Therefore, when the crash came, there was still this fundamental shortage of housing, which keeps prices ‘artificially’ high.

Why UK property prices may be overpriced


  • Interest rates set to rise. UK interest rates have stayed at zero since early 2009; this period of ultra low interest rates has benefited the property market and kept mortgages affordable. If interest rates rise back to ‘normal’ rates (e.g. around 5% – many homeowners will see a sharp rise in the cost of mortgages, causing demand to fall. The Bank of England recently did a survey and found a two-percentage-point rise in mortgage interest rates would likely raise the proportion of mortgagors with a debt service ratio (DSR) of at least 40% from its current level of 4% to about 6% (360,000 to 480,000 households)


    UK housing – prices kept affordable by low interest rates.

  • House price to income ratios. House prices have risen much faster than incomes, meaning the younger generation are not able to get a mortgage. The average age of mortgage holders has increased, and the deposit required has also gone up. Because house prices are so expensive, there are many who cannot consider buying.

    House price to earning ratios for first time buyers. The ratio is 5.0 significantly higher than previous decades.

  • Buy to let market. With home ownership rates falling, the growth in demand for housing is coming from investors.


    These investors are more likely to be sensitive to changing house prices. If there is a sustained drop in prices, this may be magnified by investors leaving the UK housing market.

  • Economic growth is still fragile. Although the UK recovery is reasonably strong, the Eurozone looks weak with anaemic growth and the threat of deflation; there is a strong possibility that a weak EU economy could act as a drag on UK growth.

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Falling UK tax revenue

A few years ago, I wrote several posts about the need for a government to borrow in a recession. One thing I would have said is that when the economy recovers, tax receipts will automatically rise and the deficit will fall. You could almost say ‘solve unemployment and the deficit will take care of itself.’

The logic is that even if you keep tax rates the same, economic recovery will lead to higher tax revenues, for example,

  • With greater consumer spending – VAT and Excise duty revenues will rise
  • Rising incomes will lead to higher income tax and NICs.
  • Greater profitability will lead to higher corporation tax.
  • Recovery will help housing market and stockmarket lead to more stamp duty and capital gains.

However, one feature of this recovery is that tax revenues have proved disappointing. Tax revenues have increased by a small amount, but as a % of GDP, tax receipts are struggling to keep up. In particular, corporation tax and income tax have fallen behind schedule.


This shows overall nominal HM Revenue and Custom revenues. Not adjusted for inflation.  (Note. This also excludes other sources of Government revenue) See Tax revenue sources for more detail.

  • In 2007/08, tax receipts were £451 bn
  • In 2013/14 tax receipts were £489 bn

This is very weak growth, when you remember these are nominal figures.

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Government spending cuts to 35% of GDP

Firstly, I thought it might be helpful to talk about the different types of spending cuts that people refer to.

  • An actual cut in government spending. e.g. one year we spend £39bn on defence, the next year that is cut to £38 bn. This is a nominal cut of £1bn. The real cut will be even bigger.
  • A cut in real government spending. If inflation is 3% and government spending on education rises by 1%, that is a real cut of 2%. Departments will still have to cut back on wages and spending because with inflation higher than spending rises, they can afford less spending. It is fair to call this a spending cut
  • A cut in % of real GDPgovernment-spending-percent-gdp-obr-14Note figures for 2018-19 are a forecast. The big issues is that the Chancellor has proposed reducing the size of government spending as a % of GDP to lowest since 1948. Real government spending will rise, but as a % of national income it will be lower.

    Suppose, real GDP rises by 3%, but one department sees a rise in real spending of 1%. In this case, the department has a smaller share of national income, but at the same time has a real increase in the amount of money. This isn’t a cut in government spending, but it is cutting the share of GDP spent on that department.

  • A cut in quality of services. This is even more subjective. Suppose economic growth is 3% a year, but we increase the NHS budget by 4%. This is a real increase, and we are spending a higher % of national income on health. However, some may argue the demand for health care is rising by 8% a year due to rise in number of old people, rise in obesity e.t.c. Therefore, unless we match the demand for rising health care, it will lead to a cut in the quality of service and a rise in waiting lists. It is disingenuous to call a 4% real rise in spending a cut, but people’s experience of the NHS may feel like they are experiencing a cut.

Government spending as a pie chart


Which piece of pie should be cut?

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UK Government spending – real and as % of GDP

In 2013/14 the UK government is forecast to spend a total of £ 722.9 billion – nearly double 2000/01 spending of £359.6 billion


Source: ONS Public Sector Finances MF6U – October 2014

Government spending as % of GDP


Updated Forecasts of Government spending from Autumn Statement of Dec. 2014


Source: OBR, Dec 2014

Note 2013/14, government spending as a % of GDP is approx 41.2% of GDP. This is forecast to fall to 25% of GDP by 2018-19. This will require several years of great government spending restraint and high economic growth.

Government Spending and borrowing

Of this government spending:

  • Current spending = £671.5 bn
  • Capital spending = £51.3 bn

Background to government spending

In 2000-01, several years of government spending restraint combined with rising economic growth, saw government spending shrink to under 35% of GDP. Between 2001 and 2007-08, spending rose to over 40% of GDP due to sustained increases in spending on health, education and welfare spending.

  • Between 2008-09 and 2009-10, the UK saw a large drop in real GDP of 6%, but due to automatic stabilisers government spending increased (e.g. higher unemployment benefits). This caused government spending as % of GDP to rise to 47%.
  • Government spending as % of GDP is forecast to fall closer to 40% of GDP by 2016-17 (if growth targets are met)

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Savings ratio UK

  • Definition of Household savings ratio: The percentage of disposable income that is saved. (1)
  • Total savings = Disposable income – Household consumption

UK Saving Ratio

Latest UK household savings ratio: Q2 2014 = 6.7


UK Saving ratio source: National income accounts Q4 ONS

Note: stats were revised upwards in a recent update.

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Benefit spending in the UK

A quick look at benefit spending in the UK. This is a follow up to  Social security spending. Thanks to HM Treasury for help in finding useful data set.

Source: Public Expenditure Statistical Analysis 2014 | Data Chapter 5 – 5.2

Social Protection spending

Firstly, there has been a modification to the category of government spending, now labelled – ‘Social protection spending’ – See: Social protection spending. This is not just welfare benefits. It includes personal social services, e.g paying for nursing, care in the community; (spending which could  perhaps be better included with health care).

Secondly, by far the biggest level of social protection spending is pension spending. This includes both state pension payments and (I believe) state occupational pensions to retired public sector workers.


It is a very unwieldy sub-division of government spending, but if we look at whole budget it increased significantly during the great recession 2009-2013. This is partly due to the cyclical higher welfare payments expected during a period of unemployment and low income growth.

However, on closer examination, by far the biggest increase in spending from the social security budget is from pensions. Pension spending increased from £83bn in 2009/10 to £104.4 bn in 2013/14. An increase of £21 bn. In a period of so called austerity, that is a big increase in government spending.

  • Unemployment benefit payments fell in this period from £5.5 bn to £4.9 bn
  • Sickness and disability benefits rose from £30.6 bn to £37.5 bn
  • Income support, tax credit (both family and social exclusion) declined from (£45.8bn) to £ 43.9 bn)
  • Housing benefit from £22bn to £26bn (see: more on Housing benefit)

UK Pension spending

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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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