State of the UK Economy (November 2016) – YouTube

Essential viewing for AL students (also useful for IB). You are expected to be up to date with current UK economic performance and forecasts. Don’t forget to subscribe to the the T2U channel – many very useful video presentations.

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What next for free trade?

For two hundred years, economists have argued in favour of free trade. Indeed the principle of comparative advantage, where countries specialise in the goods and services in which they have the greatest relative advantage over other countries, is one of the key principles of economics.  However, with the election of Donald Trump the prospects for free trade are not looking good. He has talked of imposing 45% and 35% tariffs on imports from China and Mexico respectively, abandoning the Trans-Pacific Partnership of twelve countries which was agreed in February, and even withdrawing from the North American Free Trade Area and leaving the World Trade Organisation.  All of these measures are intended to protect and restore American jobs. However, it is worth reflecting on a protectionist policy introduced by his predecessor.

In 2009 President Obama imposed a tariff (which eventually reached 35% by 2012) on tyre imports from China. As a result, Chinese tyres were replaced by domestic tyres and also more expensive tyres from Indonesia (an example of trade diversion). Although 1,200 jobs were saved, benefitting the economy by $48m, the cost of the tariff to consumers, in the form of higher prices was $1.1bn. Furthermore because of the inelasticity of tyres, the higher prices paid, resulted in a fall in expenditure elsewhere.

The Autumn Statement

Now that the dust has settled on the Autumn Statement, it is worth reflecting on what was announced by the Chancellor. However before  that, there was a wealth of interesting data on the UK in terms of current performance and projections which are set out in the table below.

  2016 2017 2018 2021
Real GDP Growth 2.1% 1.4% 1.7% 2.0%
Inflation 0.7% 2.3% 2.5% 2.0%
Unemployment 5.0% 5.2% 5.5% 5.4%
Government Borrowing £68bn £59bn £47bn £17bn
Rise in real earnings 1.5% 0.1% 0.4% 1.7%
House price increases 7.8% 4.0% 4.1% 4.7%

However these projections must be treated with more than the usual scepticism since economic uncertainty is high given the doubt existing over the arrangements which will apply once the UK leaves the EU. However it is clear that, without additional measures, unemployment will increase and the OBR estimates that average real earnings will be  £830 per person lower in 2020 than predicted 10 months ago.

The Chancellor was concerned to provide a fiscal stimulus to assist in offsetting uncertainty caused by Brexit and to help those suffering economically – the JAM (just about managing) cohort identified by the Prime Minister – while, simultaneously needing to show that he had control over public finances.

In his speech he set out three new rules which were:

  • Reducing the structural deficit (or Public Sector Net Borrowing) to less than 2% of GDP by the financial year 23020/21. This replaces his predecessor’s target of a budget surplus by 2020.
  • A decline in public sector debt as a percentage of GDP from 2020
  • A cap on welfare spending from 2021.

Many key measures were focussed on productivity to attempt to improve the situation where a German worker produces in four days what it takes a UK worker five days to make. This is mainly down to low investment with the UK last year investing 17% of GDP compared with the OECD average of 21%, placing the UK 33/35 in its ranking. (Individual categories of investment are equally disturbing with the UK ranked 34Th on transport investment with 0.6% of GDP being spent on it- less than 1/3 of the OECD average – and near the bottom on investment in IT and in machinery)

The Chancellor announcing a £23bn National Productivity Investment Fund which is aimed at increasing the money flowing in to research, development and innovation in areas such as rail, road, digital improvements and housing over the next five years. This will include an extra £8bn for housing, £4.7bn on R&D, £3bn on transport, £1bn supporting investment in new broadband infrastructure.  He is also increasing the living wage from £7.20 to £7.50 per hour from April.

As a result of his plans, government borrowing will increase by £58.7bn over five years and the National Debt (the cumulative total of government borrowing) will increase from £1.64trillion to £1.95trillion by 2022 and as a percentage of GDP will rise from 84% of GDP in 2015/16 to 90% in 2017/18, the highest it has been for 50 years.