Policy Research in Macroeconomics

Spend for recovery & green future, raising corporation tax is ok, & there are no bond vigilantes

Business closed. Photo: Jeremy Smith
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A couple of weeks ago, my old shower broke down, needing replacement. Chatting to bathroom-kitchen store manager, I learnt that business was brisk for them, especially the demand for new bathrooms.  In fact, very brisk. Lots of people wanting new bathrooms for their holiday to-be-let homes, with higher rents in mind, as well as for actually lived-in homes. His order book is far stronger than in ‘normal’ times.

For those who ‘have’, the times are not – financially speaking – bad at all.

All this is mainly planned substitute spending; instead of overseas holidays, frequent eating out or public entertainment, many are choosing new home improvement projects.

Finding the money is unlikely to be a problem for this segment of the population.  In a recent speech, Bank of England Chief Economist Andy Haldane said:

“Excess savings currently total around £150 billion for households and over £100 billion for companies, with the lion’s share of these savings are in highly liquid bank deposits.”

And yesterday, in the Financial Times, Valentina Romei reported that

“Households deposited an additional £18.5bn in bank accounts in January, data published on Monday by the Bank of England showed, well above the £4.8bn monthly average for the six months to February 2020, before the pandemic struck… The BoE calculated that between March and November 2020 consumers accumulated £125bn in savings, but now the amount has passed £160bn.”

The question is what percentage of these savings will be spent over the coming months. The latest ONS data on household savings ratio shows that in Q2 2020, the level of household savings reached a vast 27%, and in Q3, it was still over 16%.  This compares with around 12% at the peak of the financial crisis, and similar in the recessions of the early 1980s and early 1990s.  As will be seen, the savings rate remained around 8-10% from 2009 to 2016, then fell to around 5-7%.

Haldane argues, bullishly (and just before trying to scare us with inflation doom), that most of the extra savings will be spent or moved:

“In its latest projections, the MPC assumed around 5% of savings in aggregate would be spent. This is a conservative estimate. Milton Friedman famously described money as a temporary abode of purchasing power.

If that definition holds true, by the middle of this year as much as £400 billion of savings by households and companies (around a third of annual GDP) will be seeking a new home, whether physical or financial assets or goods and services. This would provide a very significant degree of additional demand stimulus to an already rapidly-recovering economy.”

But what of the losers in the COVID economic lottery? We know who won – those on good fixed incomes, those in higher paid jobs, those with university education, those who tend not to be young…

So the losers? Here’s how the Office for National Statistics put it:

“The labour market shocks associated with the coronavirus (COVID-19) pandemic have been felt more by young people and the lowest paid; people aged under 30 years and those with household incomes under £10,000 were around 35% and 60%, respectively, more likely to be furloughed than the general population.

Of those who have not been able to work (either because of being on furlough or for another reason), over half (52%) of people in the top income quintile continued to be paid in full, while this was the case for only 28% of those in the lowest income quintile.

By December 2020, nearly 9 million people had to borrow more money because of the coronavirus pandemic; the proportion borrowing £1,000 or more also increased from 35% to 45% since June 2020.”

So while the personal savings of the well-off soar, so do the personal debts of the not-well-off.  The position of private sector tenants who have hit hard times – and so may owe large sums to their landlords – needs also to be recalled.

Economic restructuring that promotes monopoly power

The economic consequences of COVID are not only felt in simple calculations of income, debt and savings.  With the enforced closure of whole swathes of the economy, including many small and medium-enterprises, and in particular the move to digital, on-line activity controlled by a small number of tech monopolies, power has shifted still further from workers to capital.  This trend has of course been underway for a long time, with the absurdly named ‘gig economy’. 

We should recognize that the move to online not only causes many jobs to be lost, notably in retail, but also causes new jobs to be created – though probably fewer than those lost.  These extra jobs are mainly in the software and tech zone, plus workers in the “fulfilment centres” or warehouses, plus delivery drivers.  It is not evident that most of those who lose jobs in this ‘revolution’ (and it would seem that women are likely to be worse hit) will have the aptitude or availability for these very different work areas.  In any event, the trends towards greater monopoly (dominant control of product markets) and monopsony (effective control over labour market, and thus ability to hold wages down) are accelerating.

Budget tasks: first, protect those worst affected

The first requirement for the budget is to protect the less well-off, be they unemployed, in low-paid jobs, in furloughed employment, or simply on benefits. This involves support to individuals’ incomes, and support to the ‘social wage’ through protection and enhancement of public services.

On individual incomes, this requires the furlough scheme to continue for several months more (e.g. to end September), even assuming the COVID pandemic subsides as ever more are vaccinated.  This would probably cost around £25 billion (average around £4 billion per month) for this period

And it may require industry-or sector-targeted extensions of the Job Retention Scheme beyond that date, at most to the end of the year, for any industries/sectors that remain closed or only able to operate in a limited way. (Ditto for the self-employment income support scheme).

It is essential to continue on a permanent basis the £20 per week increase in universal credit, due to expire at the end of March. The cost of this is estimated at £6 billion a year, which is about 0.3% of GDP, and which helps to maintain spending capacity among the poorest (thus recycling into the wider economy).

The other positive step that needs to be taken is support to tenants in private sector rented accommodation, who are liable to have fallen into arrears, especially if they have lost their job.  If nothing is done, we are liable to see large-scale evictions, and a sharp increase in homelessness.  Again, younger people are likely to be more badly affected.  The number of tenants in arrears is estimated at around 800,000.  A hardship fund of £0.5 to £1 billion would enable this crisis to be avoided.

Budget tasks: second, protect and enhance public services – the social wage

The policy of austerity imposed by the Coalition government and subsequent Conservative governments since 2010 has had a doubly damaging impact – it was damaging for the economy as a whole, as it removed spending power from the economy, and it was disastrous for many public services.  Since it is the less well-off who tend to need and use many public services most, the large-scale reductions in many services has involved an additional cut in living standards via the “social wage” that public services represent.

Many of the most essential services (health apart) are provided by local government, which requires further short and medium term financial support to start restoring the level of services it provides.

In addition to services used by the public as part of the social wage, there are also the regulatory services which have been shredded and need to be rebuilt.  Whether we look at non-enforcement of employment protection legislation (e.g. sweat shops, unlawfully low pay etc.) or building regulations (leading e.g.to the Grenfell fire and the awful financial burden now imposed on affected lease-holders), the ideology of the ultra-free market has been allowed in practice (if not in law) to ignore or reduce standards below what is acceptable or ethical – and now shown to cost vast sums to deal with the consequences.  This budget needs to ensure that strong regulation is rebuilt in areas that affect workers and citizens

Budget tasks: third, protection of businesses badly affected by COVI

It is evident that businesses forced to close or greatly limit their services for long periods due to the pandemic and at the behest of government require financial support to prevent them from being forced to cease business permanently as a result.  There are of course deeper changes underway, especially in town centres, but in the short term, support for businesses is essential.

Budget tasks: fourth, invest in our green future and in social housing

The government has already earmarked a capital budget for 2021/22 of £100 billion, which represents 5% of GDP.  This is to be welcomed in that it is the highest level for many years.  However, it does not go far enough in kickstarting the Green New Deal, and it does not provide for a large-scale investment programme in social housing. 

Though such a programme takes a little time to gear up, an addition £40 billion (2% of GDP) capital investment should be allocated for these purposes.  Instead, government appears to be backing house purchasing of properties up to £600,000, via publicly-funded guarantees.  Now £600,000 is more than double the average house prices, so this is a programme to subsidize well-off house purchasers and in particular, property developers and land speculators.

Should we increase any taxes to “pay for the government’s spending”?

Chancellor Sunak has been busy briefing about how, “once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this.”

Today’s FT reports him saying:

“Once we are on the way to recovery, we will need to begin fixing the public finances and I want to be honest today about our plans to do that,” he will say.  He will set out “a path for future tax rises — including increased corporation tax — to start repairing the damage to the public finances caused by the lasting “scarring” effect of the pandemic.”

Of course, increasing taxes, especially those that impact on most of the population, withdraws money and spending power (demand) from the economy, and therefore tends to reduce economic activity.  It can have a knock-on impact – if everyone reins in spending, businesses generally are affected, and may reduce staff or wages, which means less spending power generally..

And as public debt is generally considered as rising or falling not  so much in absolute terms, but as a percentage of GDP, a lower GDP means (other things equal) a higher ration of debt to GDP.  And worse if more people are out of work and on benefits, government debt is likely to rise in consequence.

So the best way of reducing the impact of debt, i.e. the ratio of debt to GDP, is by raising the level of economic activity.

But tax – even though not required to enable government to carry out its activities and spend – is essential in tackling inequality, and in ensuring that all parts of society contribute to the common good. Taxation is also, of course, required to ensure that the economy does not ‘overheat’, but that is not today’s problem.

The less well-off tend (for obvious reasons) to spend a greater proportion of their current income,  while the rich tend to save more of theirs, whether held in more liquid forms, or via purchase of assets as a means of wealth enhancement. Thus a reduction in income via increase in tax may – unless it is targeted – affect the poor and middle earners proportionately more.

Since the well-off have ‘saved’ enormous sums during the pandemic, as we have noted, they have resources ready to spend, which may help to create some employment in the UK, but may also tend to suck in more imports.  It seems likely that much of it will not be spent.  Therefore, even an income tax rise for high earners (e.g. a new upper rate of say 50% for the top 1% of income tax payers) would not tend to lower the amount of spending in the economy by the amount of the tax increase proceed.  It would certainly be a clear statement that the well-off have done very well during the pandemic, and it would be a symbolic step to government saying that an ever-widening gap between rich and poor is not acceptable.

Even less problematic would be a staged increase in corporation tax, which Chancellor Osborne had foolishly set on an ever-downwards course, so that the UK is now at the lower end of OECD countries, along with tax havens such as Ireland. It seems that Chancellor sunak is minded to raise corporation tax, and we should support him in so doing. I understand the Labour Party’s position that “this is not the time for tax rises”, a position that in general terms is right, but there is no economic reason why an increase in corporation tax (which only applies where there are profits to be taxed) should reduce the scale and speed of post-pandemic recovery.

And finally…

There is no such beast as a ‘bond vigilante’. They do not exist. Interest rates have risen a little, but the government’s Debt Management Office has today raised over £1 billion via a 40 year gilt, with a yield of 1.26%.  That’s a little more than it was paying a couple of months ago, but extremely low by historic standards.  We can afford to spend what is required to deal with the pandemic and its aftermath.  We just need to make sure the economy is strong and our society is fairer; the public finances will then recover, as by the wave of a wand.



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