Christian Spence, Head of Business Intelligence, talks tax, spend and devolution.Not only is today my birthday but, according to the Adam Smith Institute, it is Tax Freedom Day, the first day of the year for people in the UK when they get to keep the money they earn instead of passing it to the government. For the first 148 days of 2014, the total income earned by the population is equivalent to the annual tax take by HM Treasury; from today onwards, it's yours!
The date moves around each year but has fallen around the end of the May or early June for much of the recent past, with 1981 seeing the latest date (20 June) and the earliest in 1993 on 20 May. This year it falls three days earlier than last year when it fell on 31 May, so maybe things are getting better for us.
The current government is grappling with a large fiscal deficit (down around a third since 2010 but still over £100bn per year) and aims to eradicate it entirely by 2018/19. Most of this reduction is predicated on a strongly growing economy with public spending moving, on the whole, very little (less than 1% per year over this parliament but forecast to be quicker in the next) though some government departments have seen much higher cuts with others being protected (local government has seen cuts of over a third since 2010 whilst health and education have been largely protected; international aid has seen a large increase but, in the scheme of things, is a relatively small spend).
The Chancellor has openly stated that he sees Britain's future as a low-tax economy. Headline corporation tax rates are on a downward path to 20% over the coming years and the personal allowance (the amount an individual can earn before paying income tax) has risen strongly, reaching £10,000 per year last month with parties competing over who can raise it further in the next parliament. However, we are seeing a change in the balance between input and output taxes. Companies who make a profit are now subject to lower taxes on that profit than at any time in the UK's tax history but input taxes (those levied before profit) are increasing.
There has been a focus on business rates over the past few years with companies increasingly regarding them as an unfair system which levies significant costs on doing business before any income has been generated. Couple this with increasing employers' national insurance contributions, auto-enrolment into mandated pension schemes and other government policy-driven levies such as those green taxes on energy and businesses are paying a greater share of their turnover in taxes though the share of profits that goes to Treasury continues to fall. Many businesses tell us that they feel this balance is now unfair and see a determination to lower the headline rate of corporation tax at the expense of other input or hidden taxes as a barrier to growth. The headline rate has an important part to play in signalling international competitiveness but it is already only a fraction of the rates in most of our key competitors and, because for many businesses the amount of profit declared is a easily-manipulated number, is only one small consideration in choosing where to domicile an international company.
Over and above all this, there is a natural tension evolving between government tax and spend. With the current government openly wanting a lower share of GDP to be collected in taxes but an ageing population requiring more money spent on health and social care, the balancing of the country's books is increasingly dependent on a strongly growing economy maintaing its course if these two things are ever going to be achieved. Efficiency in delivering services is going to become ever more important if the cost to government of delivering services for less is going to be achieved. Empowering local government and spatial partnerships to deliver more services closest to their clients could make a huge difference but the way tax is raised will have to change too. If we're going to successfully tax less and deliver more, we'll have to ease out Whitehall and increase the powers of the Town Hall. There are positive noises from the main political parties in this area, but they don't go far enough.
The quantity of goods purchased in the year to April 2014 rose 6.9% (1.3% from March 2014)
The value of goods purchased in the year to April 2014 rose 6.2% (0.6% from March 2014)
The value of internet purchases rose 13.3% in the year to April 2014 (2.6% from March 2014)
Commenting on today's Retail Sales data published by the Office for National Statistics, Christian Spence, Head of Business Intelligence, said:
"Today's data show a strongly recovering consumer economy with the amount of goods purchased in the retail sector rising at its highest rate for nearly 10 years. Weak inflation within the food sector has contributed to a fall in prices over the past year of 0.6% improving the purchasing power for households despite real wage growth having not yet appeared. The share of retail sales being purchased online continues to increase, rising by 13.3% to stand at 11% of all retail spending with internet sales from department stores rising at over 30%.
"We resist any commentary on this highlighting any form of an unbalanced recovery. With around two-thirds of the UK economy dependent on consumer spending, we would always expect to see a strong growth in this area before we see significant rises in business investment, as consumer spending is ultimately the source of business income, itself leading to greater investment by companies when they can see future demand looking strong.
"It is, however, difficult to see growth in consumer spending continue to rise at this rate whilst household disposable incomes remain constrained by a lack of real-terms pay increase. Inflation remains low, and we expect it to remain so for this year and next, and we still expect the data for the April pay round (published in June) to show stronger growth in employee compensation, finally moving pay growth into positive real-terms territory."
The leader of the Labour Party, Ed Miliband, has announced his desire to "significantly increase" the national minimum wage if elected at the general election in 2015. Last September, the party commissioned Alan Buckle, former deputy chairman of KPMG, to investigate how to restore the value of the national minimum wage which has fallen behind inflation since the recession in 2008. It is due to increase by 19p an hour to £6.50 in October, giving a 3% pay increase to around four million workers, the first real-term increase in six years.
Many economists are scathing about the impact of a minimum wage as it creates an arbitrary wage floor, pricing people whose potential output is less than the minimum wage out of the labour market and distorting real wages by creating a cliff-edge effect at its particular level. Earlier this year, the Chancellor of the Exchequer, George Osborne, suggested that the economy was growing strongly enough to be able to support a rise in the minimum wage to £7 per hour, a much larger increase than the Low Pay Commission decided to implement.
The debate around minimum wages, whether to have them and, if so, at what level they should be set, tends to polarise between the left and the right. The former believes they have an important social effect in ensuring that people can afford to live a comfortable life when in work and should not rely on state benefits to top-up their income, and the latter says that the economic distortionary effects create huge problems, primarily in driving up the input costs of businesses and in increasing unemployment, particularly amongst the young, the low-skilled, and those furthest from the labour market.
As always, the truth lies more between these two polar opposites. The positive and negative effects are rarely considered side-by-side and the potential side-effects of any policy are often not weighed carefully, with the outcome failing to deal with some of the unintended outcomes that all policy proposals generate. For what it's worth, here are my thoughts.
First, let's deal with the social issue. The left argue that a higher minimum wage, perhaps at the level of the living wage, will lift people out of poverty, reduce their reliance on state top-up benefits, giving them more money to spend in the economy and reducing state spending: fundamentally a win-win situation. It is hard to argue against the case that work should pay, but this will produce some side-effects. For those who are in work but have low skills or low output, an increase in the minimum wage can cause employers to pay more in salary than an employee actually produces. If an employee's output potential (i.e. the amount of money that they can generate for the company) is £6.50 per hour, a minimum wage set above this level (never mind the employers' NI, pension contributions, etc) means the employer is losing money by hiring them. Of course, in reality the equation is not so simple and costs are usually spread across a number of people rather than output per head directly, but this clearly can have some severe effects: the employee may be made redundant, and/or the job they previously did may be automated or off-shored to a cheaper jurisdiction.
However, if we are to begin to make work pay - a clear ambition of both the coalition government and the Labour party - then something needs to be done. The coalition is tackling this primarily by benefits reform, ensuring those who aren't in work cannot receive more in benefits than if they were working. Labour is committed, too, to reform of the benefits system but desires to see employers paying their staff more so they can enjoy a dignified life. Again, the answer is probably somewhere in between. Society needs to come to a clear answer on who subsidises "unprofitable" labour. If John's potential output is £5 per hour and society deems he needs £7 per hour to live a suitable quality of life, who should make up the difference? You can probably argue a case for employer and state here, but this needs to be answered, and we could do with seeing more research and thinking from the main political parties on this issue, because this is an important point.
Secondly, the unemployment issue. Many fear that an increased minimum wage will lead to higher unemployment as non-economically productive employees are laid-off if salaries rise too high. The evidence from a number of advanced economies with minimum wage legislation is unclear at best but, as with everything in economics, the one thing we can be certain of is there will be an effect: what's up for debate is its type and scale. Many people on the national minimum wage (around 4% of the UK workforce) are in jobs that cannot easily be mechanised or outsourced, e.g. cleaners, receptionists, bar and restaurant staff, etc. It is possible that a large number of employers would swallow the rise and pass the costs on to their consumers, increasing prices and potentially reducing competitiveness across borders, though for the roles outlined above this may not be problematic.
For me, my bigger concern is for the unemployed. The more and more expensive it becomes to hire a new employee, the less likely they are to be employed, particularly if low-skilled or with little work experience. Committing more money to someone you currently work with, and have experience of, is an easier thing to do than with an unknown person. There are substantial risks for businesses hiring new staff - these are often underplayed by politicians - and the higher the financial costs, the riskier it becomes. This is why small incentives such as £2,000 "handouts" to employers to hire young people are so ineffective: put alongside the other risks, the money is not enough to have a significant effect.
Any rise in the minimum wage should be delivered alongside a significantly improved offer to the unemployed, the young, the low-skilled and the disenfranchised. These are the people most likely to suffer any ill-effects of an increase in the wage floor. More must be done to raise their abilities so that they can compete with the better-skilled for employment. It is only fair that if government is to raise the barrier to entry in the workforce, it must help those who are furthest away from it. Only by doing this can a "make work pay for all" policy support everyone and not leave people behind.
So, put together, what does all this mean? Socially, there's a strong argument for ensuring work pays, but instead of debating the issue of levels and broad policy direction, we need to focus on my earlier point of who "makes up the difference"? Economically, we've got to avoid disincentivising employers from hiring the young and low-skilled. A recent survey of over 7,000 businesses who are members of Chambers of Commerce was overwhelmingly in support of an inflationary rise in the minimum wage; around one-in-five were supportive of a higher rise. The evidence is that business is much more pragmatic than many large business representative organisation would have you believe, and many of them are in the press saying exactly what you would expect them to about Labour's proposal.
We're proud here at Greater Manchester Chamber of Commerce to be more pragmatic, acknowledging our key role in bringing together not just the business and the economic, but the social too. We, and all businesses, have a wider place in society than being just income generators. Making work pay is a truly laudable aim, and ensuring that all people who engage in the workforce can have a dignified standard of living is vital. But policies around minimum wage levels will have an effect and, as long as those effects are understood as best as we can, and handled non-politically, I believe that business can, and will, support them. But the case needs to be better made, and the tensions between left and right need to be ironed out. The right path is in the middle, and we should all work together to help us find it.
Commenting on today’s ONS inflation figures, Christian Spence, Head of Business Intelligence at Greater Manchester Chamber of Commerce, said:
“Today's inflation statistics are broadly in line with market estimates of a pick-up in the rate of inflation with CPI now standing at 1.8%, up from 1.6% in March. The change in the headline rate is caused mostly by fuel prices being flat between March and April this year compared with a sharp fall at the same point last year, i.e. more of a statistical effect than any major change in market prices over the past two months. This has caused a sharp rise in service sector inflation, rising from 2.3% to 2.8%, only marginally offset by a small fall in goods inflation from 1% to 0.9%, driven itself by continued strong falls in total input prices with weak commodity prices in the global market.
“Factory gate prices (producer output prices) rose slightly to 0.6% in April and input prices continue to fall by 5.5% per year, though the rate of the fall is slowing compared to last month's -6.3%. Global commodity prices remain benign and the current relative strength of Sterling compared to other currencies, particularly the US Dollar (in which many commodities are priced) continues to feed weaker inflation into the UK economy.
“We believe that the outlook for inflation across the rest of the year remains benign and the Bank of England's target of 2% will broadly continue to be met. Fears of deflation are currently overblown and it is not yet clear how much spare capacity there truly is in the UK economy. The labour market is tightening quickly with employment growing at its fastest rate on record. Wage rises are close to the level of inflation (1.7% for the three months to March) and we expect the April pay round to show a stronger rise when it is fully shown in the data for the Labour Market release in June. This will place further upward pressure on pay demands within the UK but the broad inflationary environment is currently affected more strongly by levels of global trade, economic conditions in our main trading partners and their effects on commodity prices and currency trading. For now, the outlook is good, and we still expect real pay to increase from the second quarter of this year and improve further as the economy continues to grow.
“Inflation remaining close to the Bank of England target will further allow the MPC to stay its hand on Bank Rate increases which we still expect to begin to move in the first half of 2015. We believe it unlikely that the Bank would move to tighten monetary policy in advance of the United States Federal Reserve doing so and in light of potential developing monetary policy within the Eurozone. Any moves in UK Bank Rate earlier than the US would likely increase the strength of Sterling placing further downward pressure on UK inflation.”
So when will rates rise? The final whistle not for some time yet!
By John Ashcroft, Chief Economist at Greater Manchester Chamber of Commerce
The Bank of England Inflation Report was released this week. It was all so predictable. The Governor’s opening remarks explained, “The overall outlook for GDP growth and inflation in this Report is little changed from February. The UK economy continues to perform strongly, having increased by more than 3% in the past year. Output is now close to regaining its pre-crisis level, 700,000 more people are in work than a year ago, and inflation is below, but close to, the 2% target."
The expectations are for growth to increase by 3.2% in the second quarter with continued expansion in household spending, supported by an increase in real wages as inflation remains close to target and earnings increase moderately, with improved productivity.
The MPC obsession with spare capacity continues. “While there is a range of views on the Committee, the best collective judgement is the margin of spare capacity, around 1% to 1.5% of GDP.” Does this impact on inflation prospects? Not so much.
International inflationary pressures, key to current price trends, remain subdued. “The global picture is consistent with muted external inflationary pressures which, coupled with Sterling’s appreciation, will moderate CPI inflation in the near term.” Inflation has fallen sharply since the Autumn and the outlook for inflation in the medium term remains benign.
The benign outlook for inflation will avoid undue pressure in the short term to increase rates despite the strong growth figures. So what of interest rates? The strength of the recovery has moved the economy “closer to the point at which interest rates will have to rise”. So when will rates rise?
In February, the MPC were happy to attach some credence to the market view that rates would begin to rise in the second quarter of next year. If anything the view in May is slightly more “dovish” or certainly more obtuse.
“Our guidance is giving businesses and households confidence that we won’t take risks with price stability, financial stability, or the incipient expansion. It will promote the recovery in business investment, productivity and real wages that a sustained expansion demands.”
Forward guidance then morphed into strikers instructions, as the Governor explained.
“Securing the recovery is like making it through the qualifying rounds of the World Cup. That is an achievement but not the ultimate goal. The real tournament is just beginning and its prize is a strong, sustained and balanced expansion. Across the Bank we are setting policy in order to help win that prize for the good of the people of the United Kingdom.”
Yes, the Governor is employing sporting analogies and laying out his formation.
A flat back four - growth up, inflation down, unemployment up, borrowing down. Two strikers up front, household spending, now with support from business investment. Some confusion in mid field from the housing market but no mention of exports and rebalancing. So expect the odd own goal from the trade performance, as we move into the final stages of the competition.
The Governor is not “taking away the punchbowl as the match gets going”. You may continue to consume alcohol on the terraces for now. The final whistle will not be blown for some time yet.” Base rates are not expected to rise anytime soon.
For more details of our interest rate and other forecasts check out the Quarterly Economics Update due at the end of May.
· Unemployment falls again to lowest level since 2009
· Claimant count falls in all 10 boroughs across Greater Manchester
· Employment rise will cause pressures for employers to find skilled workers as demand increases
Commenting on the latest labour market figures, Christian Spence, Head of Business Intelligence at Greater Manchester Chamber of Commerce, said:
“Today's latest data show that nationally unemployment fell again in the first three months of 2014 to 6.8% of the population, the lowest level since early 2009. The claimant count, too, fell by over 25,000 to 1.117 million, a level not seen since November 2008.
“In Greater Manchester, the news is similarly positive. The GM claimant count fell by over 2,700 to just under 58,700 with the Greater Manchester Chamber of Commerce seasonally adjusted claimant count falling by around 2,500 to under 58,000, a number which excludes any seasonal effects. The strong performance is seen in all 10 of the Greater Manchester local authorities with the same results for youth unemployment - a fall in all boroughs and across GM as a whole. Total pay increases for the three months to March 2014 is shown to be 1.7%, above the latest CPI inflation for March of 1.6% and broadly level with the three-month average for the same period, further reducing pressure on real household incomes.
“The labour market overall continues to perform well with unemployment falling at a quicker rate than many expected and employment rising at the fastest rate on record. The increasing in pay rates is expected to accelerate as the year continues and, as the Chamber predicted last year, we expect the April pay round particularly to show stronger and above inflation rises. The tightening of the labour market, as unemployment continues to fall, will cause pressures for many employers seeking skilled and experienced talent for their workforces as they continue to recruit to manage the further increases in demand as growth continues at its current pre-recession rate. This is likely to continue to feed pressures into increased salaries in pay negotiations as the year progresses. Sectors such as manufacturing, construction and the important retail, leisure and accommodation industries have been seeing above-inflation pay rises for some time and, with the exception of the public sector, we expect these levels of growth to move into other sectors over the coming quarters.
“The outlook is positive but there are areas where work must continue, particularly in supporting young people and those furthest from the labour market into work so that as large a portion of the labour force can benefit from the strong economic recovery.”
· Construction data shows moderate drop in output, but significant growth forecast for 2014/5
· Production sector output up, but more growth required to reach pre-recession peak
· Exports growing faster than imports, but Government must re-double efforts to support exporters
Commenting on the latest construction, production and UK Trade figures released today by the ONS, Christian Spence, Head of Business Intelligence at Greater Manchester Chamber of Commerce, said:
“The latest construction data for March 2014 shows a moderate drop in output of around 1%, most likely affected by poor weather. However, with monthly data extremely volatile, the quarterly and annual comparisons show a more positive picture. The first quarter of 2014 showed output up 5.4% compared to the previous year and 0.6% to the previous quarter. The wider economic recovery alongside government schemes such as Help to Buy is driving the improvement in conditions for the construction sector and we continue to forecast significant growth in this industry for the rest of 2014 and into 2015. The recent Greater Manchester Chamber of Commerce Construction Sector Pipeline research indicates new work of over £11bn in Greater Manchester until 2017 delivering a significant positive impact into the local economy. The challenges for the sector are ensuring that people with the right skills can be recruited to deliver the projects, and that local authorities are able to grant planning permissions for the large volume of potential projects that now have impetus from their developers.
“The wider production sector continues to see conditions improve with output up 2.5% on the year in the first quarter, with manufacturing driving that growth with expansion of 3.5%. The sector’s fortunes improved significantly during 2013 and output is now increasing at a more normal rate of growth. There is still significant growth required before this industry exceeds its pre-recession peak of 2008. Our forecasts show that headline production figures will be held back over the coming twelve months with continued contraction in the mining and extraction sector, though our expectations for manufacturing are much more positive with growth rates of around 4% per year expected through to 2015.
“A further improvement in the trade deficit recorded for March is good news with exports growing significantly faster than imports month-on-month, however the goods deficit remains large and the monthly data is volatile. The longer-term trend is for an expansion in trade in services with a strong surplus whilst the goods trade deficit will remain large and may deteriorate in the short- to medium-term as the UK continues to outpace the growth in its major trading partners. Government must continue to redouble its efforts to provide support to exporters to enter new markets whilst encouraging non-exporting firms to seek opportunities overseas.”
Commenting on the Bank of England’s Monetary Policy Committee decision today, Christian Spence, Head of Business Intelligence at Greater Manchester Chamber of Commerce, said:
"This months’ meeting of the Bank of England Monetary Policy Committee is the first at which the headline Labour Force Survey unemployment rate is below the 7% set in the forward guidance statement of August 2013. However, despite none of the three “breakout” clauses being breached, we believe the updated forward guidance from February will mean the Bank will continue a loose monetary policy stance, leaving interest rates at their historic low of 0.5% for some time to come to further support the strengthening economic recovery.
"UK markets have fully priced-in the first rise in UK Bank Rate for spring 2015 with American markets expecting the first move from the Federal Reserve in late summer 2015. Despite strong growth in the UK, it will be difficult for the Bank of England to move in advance of the US Fed rate rise particularly when the European Central Bank is considering further monetary easing."
Dr John Ashcroft, Chief Economist at Greater Manchester Chamber of Commerce