Government Borrowing

Last week the Government published its latest borrowing figures. These revealed that the Government had overshot its borrowing target for the year by £2bn, bringing borrowing for the year 2014/15 to £74bn, or 4.4% of GDP, compared with the target of £72bn. This borrowing brings the National Debt to £1.59trillion or 80.7% of the UK’s GDP of £1.97trillion. Our figures compare with:

USA               80.6%  and 3.7%

Germany     48.8%  and 0.6% SURPLUS 

France          89.1% and 3.6%

Japan             128.1% and 5.2%

There are  good reasons for missing the targets such as recession in the UK’s export markets which have slowed our growth and the creation of low paid rather than high paid jobs which have reduced the Government’s tax receipts.and some wonder whether real’austerity’ has really taken place.

However, although borrowing was £17bn lower than 2014/15, many economists now question whether the Chancellor will reach his target of a surplus by the end of this Parliament in 2020, especially if uncertainty over the forthcoming referendum slows business spending.

Investment banks and bonuses – what’s going on?

Traditionally large US investment banks have proved to be lucrative places to work.  Very large profits have provided shareholders with attractive dividends and employees with both high salaries and considerable bonuses.  Consider the following statistics.  In 2010 Goldman Sachs set aside $15.3bn to pay its staff both salaries and bonuses, down 5% on the $16bn it set aside the previous year, but still an average of $430,000 each.  Furthermore, total bonus payouts on Wall Street were $20bn in 2012, 8% more than the preceding year; and remember that figure refers to bonuses, so basic salaries are not included.  In 2013 Barclays decided it would be appropriate to set its bonus pool to £2.4bn, an increase of 10% over the preceding year, despite the fact that annual profits at the bank fell by 32%.


However, as a recent series of articles, such as the one below from the BBC News website show, revenues and profits at the “bulge bracket” investment banks are suffering.  Bank of America Merrill Lynch reported a fall in income in the third quarter of 2014 and Citigroup announced that profits were 27% lower in the first quarter of 2016 than they had been in the first quarter of 2015.  In 2015 Credit Suisse made an overall loss of $2.92 billion and at JP Morgan profits fell by 54% in the first quarter of 2016 compared to the first quarter of 2015.  In addition, times at Goldman Sachs, nicknamed “Gold mine Sachs” thanks to its generous payments to employees, have turned very tough with a fall in revenues of 40% in the first quarter of 2016 compared to the previous year. Overall, the picture for these banks is not good in terms of profits or revenues.

Many readers will now be very concerned about the fate of the employees in the investment banking divisions of these firms.  Will they continue to enjoy the salaries and bonuses they have come to rely upon to support their lifestyles?  Well, no-one at Goldman Sachs needs to worry too much.  The management have decided to set aside $2.66 billion for its bonus pool in the first quarter. That worked out to an average of nearly $73,000 per employee for the first three months of the year.  At the end of 2015 JP Morgan also decided it would leave its bonus pool roughly unchanged from 2014, despite falls in revenues and profits compared to the previous year.

This flies in the face of economic theory.  Bonus payments at all sorts of firms are designed to solve a dilemma known in economics as, “the principal-agent problem”.  It occurs when an actor in a transaction, the principal, pays another actor in a transaction, the agent, to carry out some work on their behalf.  The problem comes if the principal has different objectives in undertaking the work from the agent.  Consider a situation where your boiler breaks down in the middle of winter and you call a plumber to fix it.  In this case you are the principal and the plumber is the agent and the work is the repair of the boiler.  Your objective is to have the boiler fixed as quickly and cheaply as possible but the plumber’s objective is to make as much money as possible from the repair.  You may find that the plumber carries out work which is not really necessary, or claims that the boiler cannot be repaired and quotes for the replacement of the boiler, when in fact the fix is simple and cheap.  This occurs because the plumber wants to maximise his profits and so has different objectives to you.

In the context of an investment bank the principals are the shareholders, who want the bank to operate as profitably as possible, and the agents are the employees.  Employees’ objectives might include having an easy life, taking unnecessary risks in trading activities for the thrill of it and leaving work early to go and play golf.  None of these will maximise profits.  In order to keep the agents’ objectives aligned with those of the principals a bonus payment is made to the agent but theory suggests it should be very closely aligned to profit, otherwise it is useless.  Therefore, if a loss is made there cannot be a bonus and any fall in profits should lead to a commensurate fall in bonuses.  The evidence from bulge bracket US banks suggests that bonuses are not being used this way.

It can only be concluded from all this that, as in many other areas, the labour market theory and the labour market practice in the area of bonuses don’t seem to be the same.  Nevertheless, it probably does not concern employees in the financial services industry too much.

BBC News online article here:


Nigeria’s dollar crunch adds to fuel crisis —


Refinery woes, currency controls and militant attacks combine to prolong acute shortage

Source: Nigeria’s dollar crunch adds to fuel crisis —

Inadequate infrastructure means that, despite being Africa’s top oil exporter, Nigeria has to import fuel putting downward pressure on the value of it’s currency, the Naira (see Chart 2 below). Value-added increases when oil is refined to become something more useful, in this case fuel, so the $’s received for each barrel of oil Nigeria exports is worth less than the $’s Nigeria has to pay for the same volume of refined oil, leading to a reduction in foreign exchange reserves (see Chart 1 below).

It is difficult to see how this cycle will end. If the value of the Naira continues to fall, the price of refined oil in Naira terms will continue to rise, further depleting foreign exchange reserves and accelerating the Naira’s depreciation.

There are several solutions, central bank intervention to revalue the Naira, but they need, already dwindling, foreign exchange reserves in order to manipulate the market price for the Naira. Investment in infrastructure, a fiscal supply-side policy, to reduce the reliance on refined oil imports is an alternative, but oil accounts for 90% of Nigeria’s export revenue and, subsequently, a significant proportion of government revenue. The price of oil has collapsed and with it government revenue, a classic example of the dangers of over-reliance on a primary commodity, prone to price volatility. The fall in foreign exchange reserves, the value of the Naira and an increasing budget deficit will make lenders nervous and will lead to an increase in the yield on government borrowing, put simply, the interest rate on government bonds will have to rise to offset the greater risk, increasing government expenditure on debt repayments.

Clearly, these options are not presently viable, but the second should have been enacted when the oil price was high and export earnings plentiful, however, corruption, some $16bn in government oil receipts is unaccounted for in the last year alone, has meant that infrastructure remains undeveloped.

A further consequence of the falling value of the Naira is that despite global oil prices falling, Nigerians have to pay more for petrol at the pump. To combat rising petrol prices the Nigerian government have imposed price controls, however, this has resulted in several-hour long queues and a rise in hidden market activity. Subsequently, Nigerians either face having to pay extortionate prices or waste valuable time queueing. Ultimately, output is lost and Nigeria’s economy suffers.

Nigeria’s relatively new president has a tough task on his hands.

Chart 1

Chart 2

Port Talbot & A’level economics

A’level economics students frequently moan  that what they have been taught is not relevant to what is going on around them while economics teachers complain that students do not relate what they have been taught to the real world!

The recent events at Port Talbot provide an ideal example to use economics concepts.

The multiplier can be used in assessing the costs to the area should Port Talbot close since not only will steel jobs be lost if the plant closes, additional jobs will also be at risk as steel workers suffer lower disposable income and cut back on expenditure,  particularly in non-essential areas.

In considering the type of unemployment created, one can use the idea of structural unemployment since many of the steel workers affected will not have the skills needed in newer, growing industries.

The possible closure of the plant is relevant to the arguments about the benefits of free trade and the theory of comparative advantage whereby UK steel purchasers benefit from cheaper steel imports from China which need to be set against the  job losses among UK steel producers. This aspect can be expanded to consider whether the Chinese are dumping steel on the world market and, if so, what action should be taken, especially in the light of the tariffs on Chinese steel imposed by the USA and those imposed by China on imports of steel from the EU and elsewhere.

A final example is in the  field of market failure where Tata have complained that the UK Government’s environmental policies have raised energy prices and helped make UK produced steel (and heavy industry generally) uncompetitive. UK electricity prices are almost double those in the rest of the EU and more than double those in China and while these high prices help to subsidise renewable forms of energy, they make life difficult for UK firms.

BREXIT- more questions than answers

Over the next two months there will be increasing discussion about whether we will be better off in or out of the EU. Some of this will focus on the political aspects, for example the potential gains in sovereignty and our ability to gain greater control of our borders  versus our loss of influence were we to leave the EU. However the purpose of this article is to focus on the economic arguments.

In theory the case for and against leaving the EU should be an ideal opportunity to apply cost-benefit analysis, weighing up the monetary costs of leaving and comparing them with the monetary benefits and then seeing which are greater. However, in practice, this will not be easy to do. Even our contribution to the EU is not clear with the Leave Campaign focussing on the £18.3bn we paid in 2014/15 (which sounds a lot) while the Remain Campaign concentrate on the net contribution which is about £9bn, which, when divided by the population, works out at less than 40p per day (which sounds very little). There is little consensus on the overall cost or benefit of being a member. The National Institute for Economic & Social Research suggested, in 2004 that membership of the EU contributed about 2% to GDP, the CBI is suggesting that each household benefits by £3,000 per year while the  Institute of Directors thinks it costs us 1.75% of GDP to belong.

Even assuming that we could agree on the amount of our net contribution to the EU, we are not going to be able to quantify the costs and benefits we will face if we leave. Crucial to this figure will be the type of trade deal we are able to negotiate if we leave. Will the EU be keen to encourage trade with us and therefore allow us to negotiate a favourable deal or will they be keener to discourage others from leaving and therefore impose significant tariffs on UK goods entering the EU? Possibly a more important question, given that non-tariff barriers are of increasing importance,is whether or not we will be able to gain easy access for our services, particularly financial services, if we leave the EU? It is true that we run a deficit with the EU but we cannot infer from this that we will be able to negotiate  a favourable deal. Almost half our exports go to the EU while only about 7% of theirs come to us, therefore a favourable deal is far more important to us than them.

Furthermore,  the deal we eventually agree will involve us making a financial contribution to the EU as Norway and Switzerland do. How much will this be and how many of the regulations we currently have to meet will we need if we leave and how much will it cost us to do so?

Another key question is what sort of trade deals we will be able to agree with non-EU countries? We would have less influence negotiating individually than we would as part of the EU given that the EU market is almost five times as large as the Uk’s.

[An unbiased analysis of the various claims and a good source of data is thr Channel 4 Factcheck (