Thursday, 27 January 2011

Should we be worried about the last quarter’s growth figures?

The ONS on Tuesday released their first estimates for growth in the last quarter which shockingly revealed that the economy has contracted by 0.5%. This was definitely not expected, predictions were for growth in this quarter of 0.2% - 0.6%.
Osborne was quick to point out that bad weather over Christmas will have hurt the economy with people unable to get to the shops to spend those Christmas pounds. When challenged on whether he would rethink his swinging cuts, that will leave a million more people out of work, in light of this poor economic performance he said
"There is no question of changing a fiscal plan that has established international credibility on the back of one very cold month. That would plunge Britain back into a financial crisis. We will not be blown off course by bad weather."
So should we rest easy in our beds, happy in the knowledge that as long as there is no more snow, Britain will continue limping its way back to prosperity and growth? Unfortunately it is not that simple. The ONS said that even without the effects of the snow growth would have been flat, which would still make it worse than predicted. This message seems to have filtered into the Tory Government’s consciousness overnight, as yesterday David Cameron at prime minister’s question time was playing down the effect of the snow. He instead said:
"Inevitably, as you recover from those things it will be choppy and it will be difficult, but the worst thing to do would be to ditch your plans on the basis of one quarter's figures."
So Cameron rather than blaming the snow is seeing this as part of the rocky road to economic recovery. But is it fair to look at these figures as just representing one quarter and therefore dismiss them as a blip? Or should we be seeing it as a sign of things to come?
Well in my view the answer is, as is inevitable in life, somewhere in the middle.   
On the one hand it is true that these figures are simply for one quarter and are in fact early estimates from the ONS which will be subject to revision. Of course this means that they could be worse, but equally they could be better. So it might not be as bad as we think and even if it is, it does not necessarily mean that we will see negative growth in the future.
But this figure is still significant.
The UK government outlined its spending cuts in the comprehensive spending review and many public sector bodies have begun to implement them but these cuts will not really begin to bite until the new financial year. This means the danger of falling back into recession (ie. two consecutive quarters of negative growth) is much greater in quarter 2 and quarter 3 of this year, than it was in the previous quarter.
The fact that we are already seeing negative growth is, therefore, extremely worrying.
The Better Way Campaign has long argued that the Government should be prioritising growth and jobs to secure the recovery. Falling back into recession is the last thing this country needs, and Osborne will even struggle to meet his primary goal of reducing the deficit if this happens.
To date the recovery has been slow and growth figures have been very low. The best that the Chancellor can hope for if he continues with his spending cuts is low growth, and the negative figure in the last quarter tells us that there is a very real possibility he won’t even achieve that.
Helen Martin- STUC

Monday, 24 January 2011

The inefficiency of the market and the wisdom of business leaders

Interesting story on BBC Scotland and elsewhere today about fears that BMI is about to axe its Glasgow-Heathrow route. If the axe does indeed fall, only BA will be left operating a route between Glasgow and London. Business leaders have raised legitimate fears over falling capacity and monopoly pricing. They intend to raise these fears directly with Michael Moore, Secretary of State for Scotland.

Why is this interesting? Well it's a very good example of a rational decision of a firm operating within a competitive market being detrimental to the national economic interest. BMI's decision makes commercial common sense; the company is supposedly losing £1m a month on its Glasgow routes and stands to make a handsome profit if it turns its Heathrow slots currently reserved for Glasgow flights over to profitable long-haul operations.

Scotland is a small, open economy on the periphery of Europe. Good connectivity is therefore very important for the effective functioning of the economy (on this much I can agree with the 'business leaders'). As things stand, decent air links with Heathrow are essential (although the STUC wants to see a significant modal shift to rail). The loss of the BMI services is a genuine problem.

So what can we expect business leaders to press for when they meet Mr Moore and/or Scottish Government Ministers? Re-regulation of the industry to ensure minimum service levels are retained for social purposes? Funding of a new state owned entrant to the industry which will prioritise the social interest above short-term profit? I suspect not...

No, I think we can safely assume that subsidy, through reinstatement of the Route Development Fund or some new mechanism, will be the only solution on the table. I don't have a huge problem with this but then again I don't spend my whole working life whinging about the size of the state, regulation, red-tape and the failure of politicians to fully appreciate the wonders of the market. The hypocrisy is mind-blowing. And of course, on the other side we can expect BAA, BA and others to embark on a campaign to reasure us all that a BA monopoly service really isn't a threat at all.

Meanwhile, politicians of all stripes will continue to prioritise the views of business 'leaders' and 'experts' over all other voices....

Stephen Boyd - STUC

The grim and largely untold story of the Scottish labour market

Further to Helen Martin's post earlier today on youth unemployment, I thought it might be helpful to highlight some other worrying trends in the Scottish labour market.

Coverage of the latest ONS statistics published on January 19th focused on the welcome but slight fall in ILO unemployment of 5000 over the quarter to November 2010:from 230,000 to 225,000. However, this fall, which we believe will not be sustained as the cuts kick in, masks a number of worrying trends:

  • The claimant count rose for the third month in a row;
  • The fall in manufacturing employment continues: 19,000 more jobs were lost in the year to September 2010 with 37,000 jobs lost since the start of the recession;
  • ‘Under-employment’ continues to rise and will act to severely constrain jobs growth if and when a recovery becomes embedded: the number of people working in part-time jobs because they have been unable to find full-time positions rose by 38% in the year to March 2010 (and by 50% since the start of the recession); the number of people working in temporary positions because they were unable to find permanent jobs rose by 23% over the same period;
  • The number of people claiming JSA for over 24 months increased by 114% in the year to December 2010;
  • The number of people claiming JSA for over 12 months showed a slight fall on the year to December but remains double its pre-recession level; and,
  • Perhaps most worryingly of all, the unemployment rate for 18-24 year olds was 17.9% for Scotland for the three months to September 2010.
...and to deal with this grim situation the Government proposes to do what? Implement immediate and deep cuts in public spending which will lead directly to around 100,000 job losses in Scotland...

Stephen Boyd - STUC

Youth Unemployment- The Facts

Every month I get a very good brief from the Scottish Government on youth unemployment which sets out what’s happening across Scotland. I thought it might be useful to reproduce some of the facts and figures from January’s brief. These figures underline just how much of a problem youth unemployment is in Scotland.
Key Figures
·     The unemployment rate for 18-24 year olds was 17.9% for Scotland for the three month period Sep - Nov 2010. This rate was 0.3 percentage points lower than the UK rate of 18.2%.
·      The employment rate for 18-24 year olds was 62.0% in Scotland, higher than the UK rate of 58.2%.
·      In November 2010, 7.5% of people aged 18-24 were on the claimant count in Scotland, higher than the UK rate of 6.8%.
·      Scotland’s youth unemployment rate is 0.3 percentage points lower than that of the UK. This is the second consecutive Labour Market Stats release where Scotland has had a lower unemployment rate.
·      Over the year Scotland’s youth unemployment rate increased by 3.2 percentage points whilst the UK unemployment rate increased by 0.6 percentage points.
·      The rise in the youth unemployment level is Scotland over the year has been driven by a rise in the number of young unemployed women. Over the past year, the number of unemployed females increased by 12,000 with the rate increasing by 5.9 percentage points. While, the number of young unemployed males increased by 2,000 people, with the rate increasing by 0.8 percentage points over the year.
·      Over the last year, the youth employment rate in Scotland has decreased by 1.7 percentage points, whilst the UK saw an decrease of 0.4 percentage points. However the Scottish youth employment rate is 3.8 percentage points above the UK rate.
·      The number of 16-19 year olds who are not in employment, education or training is 39,000, accounting for 14.8% of the age group (July 2009 –June 2010). Over two years this has increased by 3.6 percentage points. Change over the year is not significant due to small sample sizes of the 16-19 cohort.
·      The 18-24 claimant count has decreased by 840 individuals on the previous year. With a decrease of 0.2 percentage points. Scotland saw a smaller fall than the UK where the claimant count rate fell by 1.0 percentage points over the same period.
   The claimant count rate for young females (age 18-24) in December 2010 was 6.1 percentage points less than the rate for males.

I also saw a very interesting report by David Bell and David Blanchflower looking at unemployment. In this report they take the time to go over the reasons why we should be concerned about unemployment generally and youth unemployment specifically. I thought it was a useful reminder and goes to show just how damaging current economic choices are likely to be.

“The major reasons cited in the literature for why we care about unemployment are as follows:
1)   Because of the lost output involved. During a long period of unemployment, workers can lose their skills, causing a loss of human capital.

2)   Unemployment is a stressful life event that makes people unhappy.

3)   Unemployment increases susceptibility to malnutrition, illness, mental stress, and loss of self-esteem, leading to depression. Goldsmith, Veum and Darity (1996, 1997) found, for example, using data from the NLSY that being jobless injures self-esteem and fosters feelings of externality and helplessness among youths. Moreover, they also found evidence that the psychological imprint of joblessness persists.

4)   Increases in the unemployment rate tend to be associated with increases in the suicide rate. The unemployed appear to have a higher propensity to commit suicide.

5)   Being unemployed can also reduce the life expectancy of workers.

6)   Unemployment increases the probability of poor physical health outcomes such as heart attacks in later life.

7)   The long-term unemployed are at a particular disadvantage trying to find work. The effects of unemployment appear to depend a lot on how long the person has been unemployed for. People's morale sinks as the duration of unemployment rises. Longterm unemployment is especially harmful. "The long-term unemployed have largely given up hope," (Layard, 1986, p.96).

8)   Unemployment while young, especially of long duration, causes permanent scars rather than temporary blemishes.32 For the young a spell of unemployment does not end with that spell; it raises the probability of being unemployed in later years and has a wage penalty. These effects are much larger than for older people.

9)   As unemployment rates increase, crime rates tend to rise, especially property crime. Indeed, there is some recent evidence that property crime has now started to increase in the UK. According to the British Crime Survey for the period July to September 2008, police recorded domestic burglaries rose by four per cent.34 Thornberry and Christensen (1984), for example, find evidence that a cycle develops whereby involvement in crime reduces subsequent employment prospects which then raises the likelihood of participating in crime. Fougere et al (2006) find that increases in youth unemployment causes increases in burglaries, thefts and drug offences. Hansen and Machin (2002) find a statistically significant negative relationship between the number of offences reported by the police over a two year period for property and vehicle crime and the proportion of workers paid beneath the minimum before its introduction. Hence, there are more crime reductions in areas that initially, had more low-wage workers. Falk and Zweimuller (2005) find a significant positive relation between unemployment and right-wing criminal activities. Carmichael and Ward (2001) found in Great Britain that youth unemployment and adult unemployment are both significantly and positively related to burglary, theft, fraud and forgery and total crime rates. For each of these offence categories the relationship between youth unemployment and the specific crime was found to be somewhat stronger. Carmichael and Ward (2000) found that there is a systematic positive relationship between burglary rates and male unemployment regardless of age.

10)               Increases in the unemployment rate, lowers the happiness of everyone, not just the unemployed. The fear of becoming unemployed in the future lowers a person’s subjective wellbeing.”

Helen Martin- STUC

Friday, 14 January 2011

Is the proposed supermarket tax really a ‘job wrecker’?

There have been few better illustrations of the paranoid style in employer lobbying than the response to the large retailers levy or ‘supermarket tax’ proposed in the Scottish Government’s draft Budget.  The Scottish Government estimates that:

  • more than 90 per cent of £30 million generated by the proposed large retail levy will come from the largest supermarket branches or out of town retail parks;
  • of around 200 business properties listed on the valuation roll for Edinburgh's
    Princes Street
    , the retail levy would impact on 10. Another two properties nearby would also be affected;
  • of 365 properties listed on the roll for Aberdeen's
    Union Street
    , the levy will impact on just two retailers;
  • in Glasgow city centre's three main shopping streets - Sauchiehall, Argyle and Buchanan Streets - there are almost 1,200 properties on the roll. But just 17 of these will be affected;
  • of 1,798 shops on the valuation roll for Dundee, it is estimated only one non-supermarket city centre retailer will be affected;
  • of 739 shops listed on the valuation roll for Inverness, it is estimated only two properties in the centre will be affected; and,
  • of 746 shops listed on the valuation roll for Stirling, it is estimated only four shops (three of which are large supermarkets) will be affected.

At a time when the Scottish Budget is severely constrained and when we’re all meant to be ‘in this together’, the levy doesn’t look too unreasonable does it? Apparently not. Here’s Fiona Moriarty, Director of the Scottish Retail Consortium speaking at the first gathering of the ludicrously named ‘Competitive Scotland’; an alliance formed to fight what they describe as a ‘job wrecking levy’:

“Preventing this unfair tax on successful businesses is at the top of the retail sector’s agenda, and we aim to place it at the top of the Government’s agenda as well…preventing this ill-conceived measure from going ahead will be crucial to Scotland’s economic security in the months and years ahead”.

Crucial to Scotland’s economic security’?! I fear they might actually believe it. And what I wonder, would the SRC regard as a fair tax? Perhaps they can tell us.

It’s hardly worth commenting on the activities of the more feral elements of the Scottish employer lobby. But, to be fair, the Scottish Government’s proposal does raise a number of questions that should be addressed:

  • will the levy ‘wreck jobs’?
  • are large retailers being unfairly targeted?
  • what does ‘competitiveness’ mean in a retail context?

Will the levy wreck jobs?

The Telegraph reports that it is estimated the levy would result in Tesco paying an additional £9m a year; Asda £8.8m; Morrisons £4.4m; Sainsbury’s £3.5m and B&Q £2m. Marks and Spencer would pay £1.3m more, while the tax would also apply to big names such as Ikea, John Lewis, Primark, Debenhams, Next and one store operated by Harvey Nichols.

It is not made clear who provided these estimates but, given the context of the article, it is fair to assume that it was the companies or the SRC.

In a submission to the Scottish Parliament’s Economy Committee’s scrutiny of the draft Budget, the SRC provides the following examples of how rising business rates will affect its members. These examples, which I guess the SRC consider the most dramatic, are of course anonymous:

·        Company A estimated that applying a 1p increase in the poundage rate would cost its business around £260,000 from 1 April 2011. This cost would be even higher if the levy was to be applied to empty properties.

·        Company B estimated that every 1p increase in the poundage rate would increase its rates liability by around £360,000 in 2011/12. This will be in addition to any annual uplift resulting from RPI growth.

The Telegraph reported that for any property valued at more than £750k, the Scottish Government would set the levy at 15p in the pound. Wrong. Only the very largest properties (rateable value over £2.14m) will be subject to the 15p rate (actually 14.3p given that they would already have been paying 0.7p to help fund the Small Business Bonus Scheme). However, let’s for the sake of argument assume that companies A & B fall into this category.  Company A would pay at least an additional £3.9m and company B £5.4m.

Big numbers eh? Shame they’re completely meaningless. If the SRC wished to demonstrate an obvious negative impact on jobs then they would have to have shown this increase in context: what is the total business rate charge to the company? How does this increase look relative to total profits accrued from the company’s Scottish locations? How many people does the company employ in Scotland? What is the business rate increase per job and how does this sit in relation to total labour costs? What are current investment plans and are these affected by the levy?

As is the norm with corporate lobbying, none of this is supplied. So we’re left to take it on faith that the levy will be bad for jobs; that some of the UK’s most profitable businesses will be unable to absorb this relatively small extra cost without sacking workers or postponing/cancelling future investment with a wider detrimental impact i.e. construction.

Interestingly, two supermarkets – Waitrose and Sainsbury’s – have announced major investments in Scotland since the levy was proposed….and let’s leave aside for the moment the longstanding question about how much employment generated by a new supermarket is genuinely new and how much displaced. Funnily enough, the Federation of Small Business (increasingly the only employer body with which it is possible to hold a grown-up discussion) supports the levy.

Are large retailers being unfairly targeted?

Well, you know, I’m not even going there. Forcing society’s most vulnerable to bear the brunt of brutal fiscal consolidation – that’s unfair. If large retailers wish to provoke a debate about fairness then let’s widen it to include their tax affairs, disparities between executive and shopfloor wages and pension arrangements and environmental impact.

What does ‘competitiveness’ mean in a retail context?

It is so amusing that the new alliance against the levy has chosen the name ‘Competitiveness Scotland’? They clearly have no conception of how ridiculous they make themselves look to…well…anyone who isn’t a business lobbyist.

Retail is not exposed to foreign competition. I really hope Competitiveness Scotland accepts this much. However, they also seem to suggest that Scotland will lose out over the rest of the UK given that the levy will result in a higher business rates ‘burden’ north of the border.

Again, this is quite meaningless without further context: what proportion of the total cost base of a large retailer will the levy account for? I don’t know but I’m guessing it will be minimal. Or less. Ok, even a minimal proportion of the cost base could still reach the millions of pounds. Could this possibly provide sufficient reason to cancel investment? I think the actions of Waitrose and Sainsbury’s speak louder than lobbyist puff.  Large retailers will go wherever the market is of sufficient size for them to generate profits. It’s hardly credible to argue that this levy will be the tipping point for cancelling investment.  

It’s telling that lobbyists for large retailers are so bullish about provoking discussions on competition related matters. Yes, we hear a lot of rhetoric about the benefits of competition between the supermarkets but the level of profits achieved year on year indicates that the market is much closer to oligopoly than perfect competition. Hardly surprising when four firms so dominate the market. Funny how lobbyists drop the neoclassical economics when it suits them.

Perhaps the really important issue arising from the proposed levy is how politicians will respond to the employer backlash. What are the consequences of Scotland’s politicians conceding further ground on taxation to big business?

Before answering this it’s worth emphasising that Scotland’s businesses are not over-taxed. The World Bank currently rates the UK at 4th out of 183 nations in its ease of doing business rankings. On the ‘paying taxes’ component of this composite index, the rank is 16th. This indicator considers the level of taxes and the administration ‘burden’ involved in complying with tax responsibilities. Scotland doesn’t appear separately on the rankings but if takes a Herculean feat of imagination to believe that the proposed levy would dramatically alter Scotland’s position.

Exaggeration and distortion of the nature and scale of business taxation is endemic and the positive case for business taxation is hardly ever promoted in the public realm. It used to be generally understood that corporations earn their “social license to operate” insofar as they contribute to the general good of the societies in which they exist. This now appears to be a quaint and unrealistic ambition.

The consistent inability of politicians to take on the employer lobby on tax leads to very damaging outcomes:

·        An inability to collect taxation due – the success of corporations in avoiding and evading taxation continues to be prodigious. (Incidentally, one of the advantages of property based taxes such as the levy is that they can’t be avoided). This increases corporate profits and shifts taxation responsibilities increasingly onto workers thereby reducing final demand, increasing inequality and rendering the economy more unstable;
·        Bad policy – for instance, the Scottish Government’s Small Business Bonus Scheme an expensive, pointless exercise that hasn’t led to the creation of a single extra job. The focus on taxation also shifts the focus and resources from areas that will make a genuine difference to Scotland’s ‘future economic security’ such as industrial policy, infrastructure, skills, R&D and investment support and so on.

 With unemployment high and a range of factors conflating to ensure that it will remain so for at least a couple of years and probably much longer, it is thoroughly depressing that so much political capital is being expended on a non-issue such as the large retailers levy. Let’s hope that the Parliament will pass this measure and quickly move on to discussing those aspects of economic development that really can make a difference to Scotland’s workers and communities.

Stephen Boyd - STUC