UK Quarterly Outlook
Economics – Budget – Wealth
April 2014
James Sproule, Chief Economist
Institute of Directors
James.sproule@iod.com
@jamesrsproule
Macro Economics
UK economic forecasts remain too calm
Economic forecasts have a strong tendency to underestimate volatility
•
Consensus estimate real trend rate of UK growth to be ~2.0%
•
Disaggregating consensus does not significantly raise forecast volatility
Conclusions
•
Look to economists for a trend
•
Any trend forecast has to stack up with expected changes that can be observed
(demographics etc.)
UK GDP
(HM Treasury consensus survey forecast)
8%
6%
4%
2%
0%
GDP
-2%
Consensus Aug 2006
-4%
Consensus Aug 2009
-6%
Consensus Aug 13
Forecast
2016
2014
2012
2010
2008
2006
2004
2000
2002
Fcst Feb 14
-8%
Source: HM Treasury
European economic forecasts have
proved too optimistic
Economic forecasts have a strong tendency to underestimate volatility
•
IMF expects economies in Europe and the US to recover slowly to trend rates of
growth over the next two years
•
Looking to 2007 IMF forecasts, a slowdown was predicted, but nothing of the length
or scale that subsequently developed
•
Quantitative easing programmes in US (significant), UK (very significant) and Euro
zone (moderate), yet to provide solution to underlying financial problems
•
Forecasts specifically exclude a renewed euro zone crisis
GDP
(2007 & 2012 forecast)
5%
4%
3%
2%
1%
0%
-1%
-2%
Euro area GDP
-3%
US GDP
Forecast
-4%
-5%
2000
2004
2008
2012
2016
Source: IMF, IoD Policy Unit
Credit – still stalled
•
•
•
1918 - 2008: US money supply grew at 6%, since then it has
450
grown at 28% p.a.
400
US QE has involved wider range of instrument purchases than350
300
in UK and Japan, including Mortgage securities.
250
Banks have used easy money to rebuild balance sheets. US 200
150
bank credit has grown by -0.4% p.a. since 2008
US Bank Credit (1987=100)
100
50
1987
1990
1993
•
UK Broad money has not grown since Jan 2010
QE remains focused on Gilts, banks on meeting capital
requirements
Bank of England has indicated that it is to ease focus on
capital solvency ratios in order that banks can lend more
1999
2002
2005
2008
2011
EU Bank Credit
14
900
12
800
10
700
600
8
500
6
400
4
300
2
200
100
0
-2
Jan-11
Jan-08
Jan-05
Jan-02
Jan-99
Jan-96
Jan-93
Jan-90
UK Money Supply
0
UK Money Supply
3,000
•
•
1996
1,000
Jan-87
•
0
Jan-84
•
From 2000-08 Euro zone M3 grew by 8.8% p.a., since 2008,
growth has slowed to 2.7% p.a.
Disaggregated data shows that southern EU has seen
substantial drop in bank credit.
Flow of savings to “safe” northern Euro-zone banks has been
slowly reversing.
• Overall Target 2 system remains in deficit
• German deposits are down 23%
• Spanish claims fell by 34%, French 42% & Italian 23%
Jan-81
•
2,500
M4 (SA)
M3 (SA)
2,000
1,500
1,000
500
0
Jun-82
Jun-86
Jun-90
Jun-94
Jun-98
Jun-02
Jun-06
Source: Fed Reserve, ECB, BoE, IoD Policy Unit
Jun-10
UK CPI
5.0%
4.0%
3.0%
Misc
Resturants
Education
Recreation
Coms
Transport
Health
Furniture
Housing & H Coss
Clothing
Alcohol
Food & Drink
2.0%
1.0%
0.0%
-1.0%
1999
2001
2003
2005
2007
2009
2011
2013
Source: ONS, IoD Policy Unit
Budget 2014
UK Taxation
Tax Revenues as per cent of GDP
•
UK Tax total revenues as a per cent of
GDP - constant over last decade
(35% with a standard deviation of
0.7%).
•
•
•
55
Denmark
United States
United Kingdom
OECD
50
45
Peak 36.3% in 2006, trough
34.3% 2003
40
Highest OECD taxes globally are
in Denmark (48.5%) and
Sweden (47.4)
30
35
25
20
Lowest OECD taxes are in:
Mexico (17.9%); Chile (20.5%),
US (26.4%), lowest European is
Switzerland (28.5%).
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
UK Tax Revenues – source by tax
•
UK total General Government Outlays as a per
cent of GDP has averaged 45% since 2001.
•
The difference is the deficit and the accumulated
deficit (debt), the latter rising from X% in 2001 to
y% in 2012
Goods and
services, 32.7
Income and
profits, 36.3
Property, 11.6
Social security,
18.9
Source: OECD
Key Tax Policy Questions –
An Overview & Summary of IoD proposals
We consider that the four overarching concepts which ought to drive fiscal policy to be fairness, incentives, simplicity and
sustainability.
Fairness
Our proposals highlight areas where the tax burden could become or has already become unfair:• Reversal of significant erosion of basic rate tax band
• Aligning tax thresholds to create a more transparent personal taxation system
• Elimination of economically and fiscally undesirable addition rate of income tax
• Legislating to cap direct taxation so that individuals will always retain the greater part of their income and capital
Business Incentives
Our proposals recognise the need to provide broad based incentives across the business spectrum by:• Further business rates reliefs
• An option for all entrepreneurial businesses to opt to become tax transparent
• Removing tax distortions impacting business (or personal) decisions
Tax Simplification
It is important to enhance the stated intention to simplify taxation for both businesses and individuals by:• Removing complex requirement for entrepreneurial businesses to estimate taxable profits
• Alternative to the complex, unpopular and expensive saving for pensions
Focus on Sustainability & Fiscal Receipts
It is essential that the capacity for taxation in the economy is continually re-assessed and challenged by:• Government capital receipts need to be matched by debt reduction, not spending increases
• Taxes raising less than £5 billion ought to be challenged for fundamental reform if they create economic distortions or are
expensive to collect
Wealth
Global Gini co-efficients
70
65
Brazil
60
55
Russia
50
US
45
40
UK
35
Germany
30
France
25
20
1950
1960
1970
1980
1990
2000
• Gini coefficients are measures of a Lorenz curve: 1=all wealth is concentrated in a single
person, 0=all wealth is equally distributed regardless of merit.
• Gini above ~0.5 clearly leaves a populace disenfranchised, does a Gini below ~0.25 simply
fund a bureaucratic state and hence hinder growth?
• UK Gini hit an all time low of 24 in 1978, and has now risen in 2012 to 4, the global average
Source: UN University, IoD Policy Unit
UK Income Dispersion
3.0
1979
Millions of Households
2.5
1990/91
2009
2.0
2012
1.5
1.0
0.5
0.0
520
10,920
21,320
31,720
42,120
52,520
Annual Income (£2012)
•
UK has moved large manufacturing and Trades Union domination to smaller company
services economy
•
Elimination of punitive high tax rates now make aspiration realistic option
•
Limited movement since 2009 indicates a new equilibrium has been reached
Source: ONS, IoD Policy Unit