Readers Question on the Euro – How would Euro be affected if the UK had been a member?

Before the credit crisis and economic recession, I felt the Euro would be damaging to the UK economy.

To summarise this was because:

• Lack of Independent monetary policy, e.g. interest rates set by the ECB may not be suitable for UK economy.
• Inability to devalue exchange rate to regain competitiveness.
• Difficulty of fiscal union and geographical immobilities in an area as diverse as the EU.

To a large extent these concerns have materialised. Perhaps more than expected.

In 2008, the UK economy was much harder hit. The UK cut interest rates quicker than the ECB. The ECB also increased interest rates in 2011 when the UK economy was still weak. More importantly was the fact the UK could puruse quantitative easing which helped minimise recession.

These problems of the Euro proved to be very true. But, there was another problem with the Euro not many people predicted.

Being in the Euro leads to higher interest rates on government debt.

Many people felt being in the Euro would actually lead to lower interest rates. This is because Euro members could benefit from the fiscal strength of other countries. For a while this was true. A country like Greece with long term structural debt had similar interest rates to Germany because markets felt the Euro would definitely guarantee all Euro debt.

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Readers Question: If a progressive taxation is going to supposedly “reduce the gap between the rich and poor”, how and why does this happen?

A progressive tax means that we take a higher % of tax from those on high incomes (e.g. a 50% income tax rate for income above £150,000).

If everyone paid a flat rate of income tax of 20%, this would be a proportional tax. Everyone pays the same % of income in tax.

The UK income tax is progressive. For example, in 2011-12, the income tax threshold is £7,475.

• This means if your annual income is £7,475, you pay zero income tax.
• If you earn £8,474. Then you pay 20% on the £1,000 above the income tax threshold. (£200 in tax)
• Therefore, your average tax rate is only 2%.

However, for those earning over £150,000 there is currently a top rate of income tax – 50%. Income over £150,000 is taxed at 50%. Therefore, someone earning £200,000 will be paying substantially more tax than a low income earner. Their average tax rate will be much higher. (see: impact of 50% income tax rate)

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A feature of the UK housing market is the low quantity of new houses built compared to the long term growth in demand.

Despite high house prices, firms are unable / unwilling to build as many as market forces dictate. The supply of housing is price inelastic.

The lack of supply has meant that the UK has seen a decline in affordability of housing; as a consequence, it is difficult for young people to buy a house and get on the property ladder. Housing is another factor causing increased inequality in the UK.

Reasons to Build more Houses.

Supply is growing less than expected demand. The number of new households is expected to grow by 200,000 – 250,000 a year. Yet, supply has been averaging less than 150,000 in recent years. This leaves a shortfall of housing stock, putting upward pressure on both house prices and cost of rent.

Even at the end of the boom years, house builds were struggling to meet the target of 250,000 a year.

• The number of households in England is projected to rise by 5.8 million from 2008 to 2033, an increase of 232,000 per year on average reaching 27.5 million in 2033. (Communities.gov.uk)

The number of new houses built in the UK in 2010/11 was only 106,000.  This is partly a reflection of the economic outlook, but it also raises long term questions over sustainability of supply.

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