The NIESR blog is a forum for Institute research staff to provide an informed, independent view on current economic issues and recent NIESR research. The views expressed here are those of the authors, and are not necessarily those of the Institute.
Three senior members of the Institute were asked by the FT for their views on the year ahead. In the interests on transparency, we publish those replies. The answers given are from the Director, Professor Jagjit Chadha (JC), the Director of Macroeconomic Modelling and Forecasts, Dr. Garry Young (GY), and the Associate Research Director for Trade, Investment and Productivity, Dr Monique Ebell (ME).
A previous blog discussed the implications for government bond yields of changes to euro area monetary policy, namely a reduction of assets purchased by the European Central Bank. However, this is unlikely to be the only development that will affect long-term interest rates European governments pay on their debt, and ultimately firms pay to fund investment. A second development, which may be taken into account by financial markets, is the intensifying debate about institutional reforms in the euro area.
In a recent piece in the Financial Times, Tristan Hansen and Eric Lonergan make the case for the U.K. government to “think big and tap the bond markets to invest in a bold growth agenda for the UK economy”.
The agreement in principle on the EU Budget (along with some related aspects of the negotiation) announced on Friday 8th December seems sufficient to trigger further progress on trade talks. The basic premise for an agreement on the Budget is that even though the UK may leave the European Union formally in March 2019, the financial relationship cannot end without consideration of existing financial obligations, contingent liabilities and the splitting of assets and liabilities that have been agreed or formed during the period of the UK's membership of the EU.
In a post in 2015 I pointed out that government debt is not a bad thing. Here, I elaborate on that idea and I ask, and answer, a simple question: how much debt do we need? My answer: 70% of GDP is a good guess.
A long shadow has been cast over the British economy by the banking crisis of 2007-8. The economy slumped by about five per cent in 2009 and has been slow to recover. Economic growth, for example, was three per cent per year on average in the ten years before 2007 but has been little more than one per cent in the decade since. How does the aftermath of this banking crisis compare with those from Britain’s past? Is this time different?
GDP increases over time for two reasons. First, the economy produces more output because we use more labour and more capital. Second, the economy produces more output because we use better techniques over time. Traveling from London to Glasgow on a high-speed train is much faster than travelling there in a horse-drawn carriage. An increase in GDP for this second reason is called productivity growth.
Economic forecasting is not a single activity. Official forecasting and forecasting for financial market participants, for example, are different exercises. No-one knows what is going to happen but an official forecast is not supposed to indulge in flights of fancy. It represents an informed consensus about prospects, given what is already known for sure - tendencies that are in the data or the foreseeable consequences of recent events that have not yet had an impact on the data. A good model is necessary and sometimes sufficient for this type of forecasting.
When the Industrial Strategy was up for consultation earlier in the year, my colleagues in the Centre for Vocational Education Research (CVER) and I emphasised the importance of well-targeted Active Labour Market Policies (ALMP) to help with the re-training and upskilling in an economy increasingly affected by structural changes.
Much has been written about the impact that Brexit might have on the national economy. We know far less about how that impact might vary across the UK. In a recent paper published in the National Institute Economic Review , myself and colleagues at the Centre for Economic Performance (Swati Dhingra and Steve Machin) provide some preliminary answers.
UK productivity has been woefully poor since the onset of the Global Financial Crisis and has surprised forecasters to the downside. At the same time, employment has surprised to the upside and the employment rate has now reached record highs. In this blog we show that there is a long-established negative association between employment and productivity growth in the UK data, which signals a potential trade-off with far-reaching implications for public finances, Brexit and overall welfare.
In advance of Wednesday’s budget, our Research Director Roger Farmer’s blog which was first posted on 21 November 2016 is still timely and relevant. The article lists three facts about debt and deficits which are just as relevant today as they were this time last year.
The Chancellor of the Exchequer, Philip Hammond, will present his Autumn Statement to Parliament on Wednesday. In the heated debate over austerity, this piece offers three facts about debt and deficits which, I hope, will help shed light on the issues he will face.
There are two coincident problems facing the UK economy. The first is well-known and part of the standard economic narrative and the second is almost not really paid much attention to at all. In the first case I am talking about the productivity puzzle and in the second the long sequence of primary deficits (before interest payments on public debt) on public expenditure, that have been a feature of economic life in the UK, remarkably enough, since 2002-3.
As we approach the budget, there has been a lot of discussion about what the right path for fiscal policy is. One question is whether the Chancellor will throw off the shackles of trying to achieve budget balance over the coming years. I addressed this focus on budget balance in an article I wrote for the August NIESR Review, “Sound Finances”: Strategy or soundbite? , and it is worth exploring some of the pertinent issues that come out of that.
Given the upcoming autumn budget, I have a proposal for the Chancellor to consider. Replace taxes on dividends, capital gains and inheritance with a tax on wealth. Currently these three taxes combined raise £41b in revenue. A 1.2% wealth tax on those with net wealth greater than £700,000 would raise approximately this amount with £2b to spare to help pay down the deficit. A 2% wealth tax would raise £72b and give the Chancellor breathing room to lower taxes on wage income or to provide much needed additional resources for our nurses, firefighters and police men and women.
The French 5-year budget plan currently under review in the French Parliament deserves careful attention because it is the first one under President Macron and a unique opportunity to address some of the structural weaknesses of the Eurozone’s second largest economy: a high level of taxes and public spending, a competitiveness problem and high unemployment.
Writing in 1999 in a widely cited paper “The Science of Monetary Policy”, three leading economists, Richard Clarida, Jordi Galí and Mark Gertler, CGG, make the case that monetary policy is a science. Although there is some truth to that claim, CGG could equally well have titled their paper; “Macroeconomics: Religion or Science?”.
This week the Institute published its November Review and much of the focus was rightly on our projections of an increasing divergence in growth between the UK and other advanced economies. But what we also did was to look under the bonnet of these aggregate effects and try to understand what globalisation has meant for the different sectors, regions and households that add up to the averages. In this blog I shall illustrate by examining, the composition of post-tax income growth, why so many sections of the household income distribution are dis-satisfied with economic progress since the financial crisis.
As the United Kingdom is preparing to leave the European Union, Government policy is to seek a deep and comprehensive free trade agreement with the EU. But Brexit talks have not moved onto the trade issues yet and even if the future trade relationship is taken up in December, this gives little time and offers no guarantee that an agreement will be reached and ratified before 29 March 2019, the Brexit date. The Government has recently recognised the possibility that talks might break down and started to outline a ‘no deal’ vision of the UK-EU trade.
I recently came across this video link to a session held at the 2017 ASSA meetings on the ‘Curse of the Top Five’. The session was organised by Jim Heckman and involves a panel discussion with participation by Heckman, George Akerlof, Angus Deaton, Drew Fudenberg and Lars Hansen. I’m going to concentrate here on the presentations by Heckman and Akerlof.