Tuesday 31 December 2019

Wooing voters or tackling a real issue?

UK minimum wage to rise by four times rate of inflation

Employees over 25 will receive a 6.2% pay rise equating to £930 a year for full-time worker

Richard Partington Economics correspondent

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Apprentice workers will receive a 6.4% pay rise from April. Photograph: Alamy

Almost 3 million workers in Britain are to receive a pay rise of more than four times the rate of inflation from April, after the government said it would increase the official minimum wage.

In an announcement designed to woo low-paid workers in the immediate aftermath of Boris Johnson’s election victory earlier this month, the government said the national living wage for over-25s would increase from £8.21 an hour to £8.72 from the start of April.

Johnson said the increase was the “biggest ever cash boost” to the legal pay floor. “Hard work should always pay, but for too long people haven’t seen the pay rises they deserve,” he said.

Workers over the age of 25 on the legal minimum wage, rebranded as the “national living wage” four years ago, will receive an annual pay rise of 6.2% from April – more than quadruple the level of the consumer price index (CPI) gauge of inflation, which stood at 1.5% in November. The Treasury said the increase equated to an increase in gross annual earnings of around £930 for a full-time worker on the current minimum rate.

Pay rates will also rise above inflation across all other age groups, including by 6.5% for 21-24-year-olds to £8.20, by 4.9% to £6.45 for 18-20-year-olds, by 4.6% to £4.55 for under-18s and 6.4% to £4.15 for apprentices.

The TUC general secretary, Frances O’Grady, said the rise was long overdue. “Workers are still not getting a fair share of the wealth they create, and in-work poverty is soaring as millions of families struggle to make ends meet,” she said. “No more excuses, working families need a £10 minimum wage now, not in four years’ time.”

Details of the pay rise had been put on hold after the chancellor, Sajid Javid, scrapped the autumn budget as Johnson pushed for the snap election. Annual changes in the legal wage floor are typically announced alongside the autumn budget.

The Conservatives faced criticism earlier this month after including a caveat in the Queen’s speech that the election promise to raise the national living wage to £10.50 by 2024 would only happen “provided economic conditions allow”.

Javid had said at the Tory party conference in September that his party would set a five-year target to raise the low-pay floor from 60% of median earnings in Britain to two-thirds. He also said he would lower the age threshold for the national living wage from 25 to 21.

Labour had promised to introduce a real living wage of at least £10 an hour for all workers aged 16 and over immediately, in a policy designed to show it would move faster to support households than the Tories.

Average pay packets across Britain remain lower than before the financial crisis, once inflation is taken into account, after one of the worst decades for pay growth since the end of the Napoleonic wars 200 years ago. Annual pay growth has accelerated this year, repairing some of the damage by rising at the fastest rate in 11 years.

Unemployment has dropped to its lowest level since the mid 1970s and inflation has remained relatively stable in the past year, hovering below the Bank of England’s target rate of 2%, helping hard-pressed families to repair their finances.

Pay growth has started to fall again in recent months, however, against a backdrop of heightened uncertainty over Brexit and a slowdown in the world economy.

Campaigners say work no longer guarantees a way out of poverty, with figures suggesting that about 14.3 million people are struggling to make ends meet, including about 9 million people who live in families where at least one adult is working.

The latest government announcement does not meet the level outlined by the Living Wage Foundation charity, which sets a voluntary pay floor used by about 6,000 companies calculated to reflect what people need to live on.

The Living Wage Foundation sets its “real living wage” at £9.30 an hour and £10.75 an hour in London. Firms including the insurer Aviva, the Nationwide building society and football clubs such as Crystal Palace are among employers committed to paying the real living wage to more than 210,000 workers.

The business secretary, Andrea Leadsom, said the government would set out a future policy framework in the spring for raising the legal minimum pay level over the next five years.

Business leaders, however, said the government risked damaging companies at a time of heightened economic uncertainty.

Hannah Essex, co-executive director of the British Chambers of Commerce, which represents 75,000 businesses, said the move to raise the wage floor by more than double the rate of inflation in 2020 would “pile further pressure on cash flow and eat into training and investment budgets” at companies across the country.

“For this policy to be sustainable, government must offset these costs by reducing others and impose a moratorium on any further upfront costs for business,” she said, adding that many firms were struggling with rising costs.

Saturday 14 December 2019

We cover this in Unemployment...

But it also sits well in the Tax topic just finished. I'm think the book would be a good read...

Nations will soon find taxation
more taxing

The world of work is changing as the gig economy – and the self-employed themselves – go global. That will leave a big hole in countries’ coffers, says Dominic Frisby

Governments around the world have got a big problem on their hands. I wonder if many of them even realise it. What has been their biggest source of revenue for years is going to get that much harder to collect, just as their needs, whether to cover spending programmes or service debts, grows more pressing.

Across the developed world, 50% of government revenue comes from income taxes. The relationship between employer and employee has proved easy to tax: the levy is deducted at source. But that relationship is changing. The nature of employment is changing.

In the UK, the number of people working for themselves has grown by 50% since 2000, compared with a 6% rise in employees over the same period. London’s gig economy has grown by 73% since 2010. But this is a global phenomenon. In Europe, Australia and across Asia there are similar levels of growth. By 2030, says Ernst & Young, a full 50% of full-time US workers will be contingent.

GET READY TO GIG

In 1990, the three biggest companies in Silicon Valley employed over a million people. Today, the three biggest – Facebook, Google and Apple – have a combined market cap over 60 times higher, yet have a quarter as many employees. The largest taxi company in the world, Uber, has just 16,000 employees. The largest accommodation provider, Airbnb, has 9,053. Yet how many giggers find work as a result of Silicon Valley giants?

“IN THE US, 69% OF FREELANCERS DIDN’T REALISE THEY HAD TO FILE A QUARTERLY TAX RETURN”

Some have criticised the gig economy, saying it exploits people and does not give them the protection they deserve, but surveys show much higher satisfaction levels among the self-employed than among the employed. The large majority of giggers want to stay in contingent work to progress their careers. As we live longer lives many more of us will pursue gig work in what was previously our retirement. Many will embrace multiple income streams as machines – whether AI, robot or algorithm – replace blue- and white-collar workers. Employers like it too. Freelancers dramatically reduce the costs and other burdens of employment.

The tax implications are considerable. First, there is the loss to government of employment and payroll taxes, but far bigger is the problem that income taxes will get harder to collect. At present there are few systems in place to deduct tax at source from contingent workers. There is vast scope for non-compliance, whether accidental or deliberate. The Inland Revenue Service already attributes 44% of its $450bn annual tax gap to the improper compliance of individual business income. In the US, 69% of freelancers surveyed did not even know they had to file quarterly returns.

CHASING THE SELF-EMPLOYED

A review of employment practices commissioned by former prime minister Theresa May found that self-employed workers typically pay £2,000 a year less in tax than employees in equivalent jobs. Given that someone on the UK average salary of £27,500 would pay about £5,300 in income tax and national insurance, this is no small loss.

The response will be to raise taxes for the self-employed and to re-regulate those who employ them. Already UK freelancers who hire themselves out through limited companies have had their dividend taxes increased, while flat VAT rates for the self-employed have also been altered. Meanwhile, employers such as Uber and Hermes have come under pressure through the courts by those seeking to redefine full-time employment and gig work. Tax authorities will, I suspect, try to find ways to deduct presumed income at source from the platforms providing the work and then leave it to the individual to claim back the difference – much as withholding currently works in the US. But none of this is as clean and simple as old-school income tax.

Tax systems, built around a physical economy, have struggled with the intangible, globalised economy. Look at the problems they have with the likes of Amazon, Facebook and Apple. What happens when workers themselves globalise? One estimate is that by 2035, a billion of the world’s six billion people will be “borderless”, working via the internet in multiple jurisdictions and never spending more than 183 days in any given one. Many will use borderless crypto money, often the most efficient system of payment across the internet, which itself is hard to tax and regulate.

The nations that adapt soonest to the realities of the new, digital, globalised economy around us will be those that thrive best. I don’t see a single British politician talking about, let alone preparing for, any of this.

Daylight Robbery: How Tax Shaped Our Past And Will Change Our Future by Dominic Frisby, Penguin Business, £20. Audiobook on Audible.co.uk. Signed copies are available at dominicfrisby.com

Sunday 24 November 2019

Pritchard again - Fiscal Expansion:

Think about the key points - investment vs current spending, inflation, supply-side gains:

Finally the dawn arrives at our long-benighted Treasury. The Chancellor is right to tear up the fiscal rule book and start to plug an infrastructure deficit that has done great damage to the British economy.

Sajid Javid is lifting the public investment target from a long-term average 1.8pc of GDP - and a nadir of 1.4pc in the austerity years - to the OECD level of around 3pc. The most successful countries are even higher.

This should have been done in the recession aftermath when the UK economy had a frightening output gap and ample spare capacity. The bang for the investment buck would have been greater. The multiplier would have been more potent.

Arbitrary fiscal rules and contractionary debt targets - shibboleths with scant grounding in economic science - shaped British economic management for a decade. This persisted even after such assumptions were repudiated by the arch-priests of orthodoxy at the International Monetary Fund.

But better late than never. The Government says we need to spend £600bn on infrastructure over the next ten years to plug the gap and prevent the country being left behind in the global rush towards artificial intelligence and digital technology.

The Chancellor is right to hail “new rules for a new economic era”. The Treasury can borrow until mid-century at real rates of minus 1pc. He is also correct that “there is a growing consensus around the world that the time is right to do it.”

Investment reflation is the new ethos in Davos, at the Bretton Woods institutions, among the banks. As a former managing-director for Deutsche Bank in Singapore, Mr Javid knows this better than his parochial critics.

The risk of a serious inflation backlash - and therefore a sustained surge in borrowing costs - is almost nil within the foreseeable future. Were rates to spike, the shock would cause a global stock market crash and a wave of corporate debt defaults. The process would therefore short-circuit very quickly.

As Lord Mervyn King said at the IMF last month, the world is stuck in a "secular stagnation" trap. There is a chronic surplus of savings over investment. Global demographics are getting worse, not better.

Yes, the frugal Margaret Thatcher once said it is “always cheaper to pay cash” than to borrow but she was living in a world of anti-inflation bond vigilantes. The current pathologies are more like the 1930s but with no end in sight. Frugality becomes your enemy.

In short there is no global market constraint on British borrowing so long as the money is spent competently and with an eye on the long-term economic return - that is to say on projects with an average multiplier above 1.0, a low bar. Fears of a Gilts strike akin to the Greek or Italian debt crises are misguided. Eurozone states do not have their own sovereign lender-of-last resort.

As a precaution, Mr Javid has established a “debt interest rule”. The alarm goes off if interest rates jump and the debt-service ratio rises above 6pc of revenue. It is currently 2pc and trending down.

The Chancellor’s Rule One is a “current budget” limit stipulating that day to day spending must be in balance over three years. Investment is excluded. We are back to Gordon Brown and the Golden Rule. Good.

The IMF says that right now the total cyclically-adjusted UK deficit is 1.3pc of GDP, compared to 2.3pc in Spain, 2.9pc in Japan, 3.4pc in France, and 6.3pc in the US. We are hardly on the cusp of Weimar.

The Treasury’s National Infrastructure and Construction Pipeline says we need to spend £125.4bn over this year and next, half-funded by the private sector. Projects such as the Thames Tideway Tunnel and Hinkley Point C are already underway. Shifting up to the Chancellor’s new targets is not technically easy given the planning times.

“This is going to have to be really well-thought out,” said Carys Roberts from the Institute for Public Policy Research (IPPR). One suspects that it has been rushed for electoral impact. However, there are maintenance bottlenecks across the country with a high and quick rate of economic return. This is the low-hanging fruit.

The IPPR recommends a development bank along the lines of Germany’s KfW that borrows up to 2.5pc of GDP each year with a state guarantee, yet its bond are not deemed public debt - the model for Labour’s national investment bank.

The Chancellor might do well snatch that idea, attribute it to the prudent Germans, and push the UK’s effective investment-to-GDP rate towards 4pc, the benchmark for the world’s best. But today’s pledge is an excellent start. The era of obscurantism is over.

Keeping an eye on key economies:

Germany is not out of the woods - nor is China

Ambrose Evans Pritchard in the Telegraph Nov 14th

Germany has escaped recession but remains mired in industrial slump, leaving the country acutely vulnerable to China’s intractable woes and any further slowdown in global trade.

While Germany’s manufacturing sector has begun to stabilise after two years of contraction, this may not be enough to stop the gloom spreading to services and consumers over coming months.

The economy eked out 0.1pc growth in the third quarter but this was offset by revisions showing a deeper fall in the preceding quarter. In aggregate the German economy contracted over the six months to September.

Chris Beauchamp from IG said the market is paying more attention to the profit shock from Daimler as a gauge of global economic health in any case.

The blue-chip mother of Mercedes - the symbol of stability and Deutschland Inc - announced a €1.3bn retrenchment and a worldwide cull of 1,100 managers, warning that it will take two years to sort out the transition to electric vehicles and shake off the damage of the diesel scandal.

Daimler’s share price has dropped 40pc since early 2015. In a watershed moment, the company was overtaken this week by Tesla, its upstart US rival. Tesla’s $63bn market cap is now slightly larger.

There are tentative signs of recovery in Germany. The "second derivative” watched closely by traders and hedge funds has turned higher. The German Sentix and ZEW confidence indicators have rebounded. The Ifo Institute sees a “light at the end of the tunnel” for manufacturing.

Yet the slightest upset at this delicate stage would smother the green shoots. Much depends on China and Donald Trump’s trade reflexes. More than any other major country, Germany lives off exports. It is highly geared to the ups and downs of the global trade cycle.

The omens are mixed. The Ifo Institute said its global economic climate index for the fourth quarter is still deteriorating, falling from minus 10.1 to minus 18.8 points. The overnight news from China was unrelentingly weak.

Ting Lu from Nomura said retail sales, fixed asset investment, export value, and land sales all deteriorated in October. Growth of industrial output fell to 4.7pc, while production of steel and cement contracted.

He said this will force the People’s Bank to inject liquidity through its lending facility and cut borrowing costs, although incipient inflation makes monetary stimulus more treacherous. Stagflation is creeping in.

The Sino-US trade conflict has compounded the damage from China’s internal woes as it grapples with debt saturation and swathes of excess capacity. This cycle is different from past episodes, mild downturns followed by quick V-shaped rebounds. It has the hallmarks of post-bubble "Japanisation’"

Liu Aihua from China’s statistics bureau issued a candid warning that the country is not yet out of the woods. “Downward pressure on the economy has increased continuously. The risks and challenges we are facing cannot be underestimated,” she said.

China’s troubles pose a structural threat to the German economic model. The German Council of Economic Experts says a permanent 10pc decline in exports to China cuts German GDP by 4.8pc within a four-year period. This level of dependency is staggering.

China is shifting to a strategy of import substitution and partial autarky for reasons of strategic security. It is no longer an insatiable market for German capital goods. It is a rival. The council said China has moved up the technology ladder and is now competing toe-to-toe in the same niches.

Andrew Kenningham from Capital Economics said it is too early to conclude that Germany is back on track after just a flicker of growth. “We think the economy will probably contract slightly next year – so a recession may have been postponed rather than avoided altogether,” he said.

Monday 18 November 2019

Short article on pros and cons of FDI

American investors have feasted on British technology businesses in record numbers, helped by the weak pound and a lack of funding for later-stage companies.

Tech companies received $4.4bn (£3.4bn) from US venture capital funds in the first 10 months of the year, against $4bn for the whole of last year, according to figures released this week. It is the highest investment level on record, says the research provider, PitchBook.

The data is being published as part of Silicon Valley Comes to the UK (SVC2UK), an annual series of events that seeks to build relationships between Britain’s entrepreneurs and America’s biggest technology investors.

The numbers were welcomed as a sign that the UK is producing high-quality tech companies, but will stoke concerns about losing control of our best businesses before they have developed in full.

This year, there have been bumper US -led funding rounds for the challenger bank Monzo, which raised $144m, and OneTrust, a developer of data privacy software that got a $200m investment.

British start-ups have no problem attracting funds in the early stages, but often struggle to find the cash required to scale up their operations. Drawn by the weak pound and a growing number of promising tech businesses, US venture capitalists are filling the funding gap.

“We should be excited that they’re over here, but a little bit nervous as well,” said Sherry Coutu, the serial investor who was an early backer of Lovefilm and LinkedIn and co-founded SVC2UK. “If the cash comes from the US, often that will increase the likelihood of [the company] being redomiciled and floated in a different country.”

She added: “It is a problem for the economy. If a large amount of the cash goes in at a later stage because we don’t follow on in our investing, and you get a tremendous return, then that money doesn’t go into UK pockets and it’s less likely it will get reinvested here.”

Britain is by far the most attractive destination for US venture capital investment in Europe, according to PitchBook. In the past five years, the UK has received $17.8bn from American funds, compared with $10.5bn for Germany in second place and $5bn for France in third.

London has attracted $3.5bn of investment this year, by far the highest amount for a city in Europe. Three of the top 10 cities for American investors — London, Cambridge and Oxford — are in Britain.

“For the UK to punch above its weight in tech globally, we have to attract capital from across the world,” said James Wise at Balderton Capital, a London-based investor that backed Revolut.

“While obviously it would be even better if more UK companies grew to be large and profitable . . . in their own right, foreign investment and acquisitions ultimately still create jobs, provide training and develop software that can have radical benefits to everyone in the UK, irrespective of where those funds originate.”

Saturday 2 November 2019

Regional Economies - important reading

Devolution must be at the heart of levelling up Britain

By Eamonn Ives @EamonnIves

The town hall in Manchester, one of the UK cities which now has a Metro Mayor Photo: Ingolf Pompe / LOOK-foto

The United Kingdom is, in truth, a bit of a misnomer. As CapX has outlined in its excellent Rebalancing Britain series the country remains deeply divided in terms of economic prosperity.

Boris Johnson has committed addressing such disparities – declaring his ambition to ‘level up’ all parts of the nation in his first speech as Prime Minister.

It is in this context that the Centre for Policy Studies this week published a report into economic imbalance in the UK and what to do about it.

We begin with a snapshot of just how unevenly the economy performs across the regions of the UK. Gross Value Added (GVA) statistics are a robust indicator of economic performance, and reliable data has been collected them on a regional per capita basis over the past two decades.

As the graph below makes clear, London stands head and shoulders above other regions on this metric. Moreover, our analysis found that the capital’s GVA per capita grew the fastest over this time frame – while other regions’ increased by 80% on average, London’s did so by 111%.

And while of course we should celebrate the capital’s success, our report is focused on working out how other regions can enjoy that same level of prosperity.

One of the most powerful tools to help struggling areas is devolving political power. While successive governments have taken steps to hand power back to the regions, we believe that process should be extended, both geographically to take in new areas, and in terms of the powers those places have.

As a starting point, all combined authorities – like in the West Midlands or Greater Manchester – should be able to enjoy the powers and responsibilities currently available to the Mayor of London. Devolution in the capital since the creation of the Greater London Authority in 2000 has given City Hall more control in areas such as transport and planning, with huge economic benefits as a result.

It has also created a strong feedback mechanism, in which politicians are more obviously incentivised to facilitate economic success. Lack of skin in the game leads to all sorts of shortcomings in politics, but if a local mayor knows their future career depends on sorting out a congested transport system, they have a lot more reason to get things right.

Beyond that, we believe that the government needs to show more ambition in devolving other competencies which it has largely retained in Whitehall. Fiscal devolution, for instance, is particularly limited – as the chart below shows, the UK is now one of the most centralised countries for tax take in the developed world, with just 5% of tax raised at a local level.

In our report, we are deliberately non-prescriptive about how a more devolved tax system should operate. Indeed, this is precisely the point of devolution – the idea that local authorities are best placed to decide how to run their area. That said, likely candidates for devolution would include property taxes like stamp duty and business rates, as well as granting more powers to local authorities over how council tax is administered.

Understandably, some may worry that greater flexibility in the tax system could trigger a ‘race to the bottom’, leaving local authorities thinly stretched and under-resourced. But these fears are probably misplaced. Indeed, an extensive OECD paper on tax competition which we cite in our report found little evidence – especially in wealthier nations – that this typically occurs when countries permit such fiscal devolution.

Moreover, even if devolution of various taxes did lead to headline rates going down, that would not necessarily be a bad thing. In everyday life, we have premium and budget versions of supermarkets, clothing retailers, and transport options, with people given the choice of spending a little or a lot depending on what they want. Why should the council they choose to live under be any different?

Allowing people this choice would give local governments to get a better idea what ratepayers want from them, and how much they are willing to pay for the privilege.

Important as devolution is, we recognise that it cannot level up Britain alone. To that end, we suggest a suite of other measures, ranging from the creation of a National Infrastructure Fund to the establishment of a new wave of Opportunity Zones – where companies in deprived areas can benefit from more sympathetic fiscal rules and business regulations.

Taken together, we believe our proposals can match the positive rhetoric of the new government in terms of wanting to level up Britain, and help to unleash the dormant prosperity in those areas which need help the most.