Universal Credit: Who Should We Trust?

Last week we covered unemployment benefits, and looked at the extent of Job Seeker’s Allowance (JSA). We also looked at the existence of in-work benefits, and discussed how they are an attempt to avoid a poverty trap – where people can end up worse off when taking a job relative to their position out of work with JSA.

The last government, driven in particular by Iain Duncan Smith, announced plans to replace six benefits with one single payment, called the Universal Credit (UC). Those six benefits are “income-based jobseeker’s allowance, income-related employment and support allowance, income support, child tax credit, working tax credit and housing benefit“.

We discussed in Monday’s Economics Conversations the impact of complex systems administered by governments – they tend to create loopholes and confused incentives, and likely discourage use of them as was originally intended (i.e. to help those out of work to get back into work). Hence simplifying such a range of different payments – which in general are in-work benefits in addition to JSA – ought to, in principle, be a good idea.

However, big changes are being made, and to big complicated systems. Different people will be affected differently by the changes, and what matters most to people is whether they’ll be made better or worse off as a result. We care, by and large, as a people, if those seeking to better themselves and work hard find themselves worse off by changes like these – it makes little sense to discourage people from trying to do better.

But how can we know what the impact will be? Can we trust the government’s own figures on the matter? Can we trust other attempts to understand the impact of changes? Doesn’t everybody have an axe to grind, some bias in their analysis? By and large, over the years, the Institute for Fiscal Studies (IFS) has established a reputation for being as thorough and objective as possible in its analyses of the things governments get up to (and the proposals made by oppositions around election time). As a result, their intervention today on Universal Credit is important.

The title of the press release is informative: “Universal credit cuts support for working families, but helps make work pay where current system creates worst problems”. The UC will be effective in reducing the overall spend on benefits by £2.7bn, the report finds, hence it’s clearly effective in that regard, and further it will “make work pay where current system creates worst problems”: so it will address some cases of the poverty trap. However, the report states that 3.1 million households will be worse off as a result of UC, and 2.3m will be better off, hence the BBC leads with the assertion that “The introduction of Universal Credit (UC) will leave working families worse off on average, the Institute for Fiscal Studies has said”.

It’s well worth a read of the IFS’s actual report, to get a sense of how we go about evaluating public policy as thoroughly and objectively as possible. Not least, it will help you to determine whether indeed, as the government asserts, the IFS “ignored other benefits such as extra childcare”. Usually a quick CTRL+F to search the document is informative. I did a search for the term “childcare”, and found five references to the term in its entirety. On page 9 of the linked PDF document (only 28 pages), the report states “One area where the UC system has been made more generous relative to the legacy system is in the level of subsidy given to childcare costs”.

Macroeconomic Uncertainty

Today’s BBC headline is the Chancellor warning about a “‘dangerous cocktail’ of economic risks” facing the UK economy in 2016, suggesting this year will be the toughest since the financial crisis. It’s more politics than economics as one reads what the Chancellor actually said in a BBC Radio 4 interview this morning, representing expectations management: after all the positive talk about the economy by the Conservatives before the election and since, things have changed somewhat in recent months to challenge that outlook.

One of those things was that GDP growth for 2015Q3 was revised down – not by a huge amount, from 0.5% to 0.4% – but a downward revision nonetheless, and along with other downward revisions has meant that the UK grew significantly less in 2015 than was previously thought.

Another is the continued low oil price which, while great at the petrol pump for the paying customer, has mixed impacts on the UK economy which does export oil.

Perhaps most interest, however, is to also consider the Independent’s take on the Chancellor’s recent actions (as well as rhetoric): it talks about the role that economic forecasts played in the Chancellor’s budget giveaway in the Autumn Statement in November, noting that they might have been “potentially unreliable”. We noted here at the time that the budget giveaway did rely heavily on forecasts for GDP growth: governments need forecasts of economic growth in order to project the tax receipts they will get, and the amounts of benefits they’ll have to pay out, which heavily influences the level of the budget deficit/surplus. If growth now comes in lower than was forecast, this will almost certainly mean that the budget deficit will be worse than expected, casting doubt on the ability of the UK economy to meet the Chancellor’s new Fiscal Charter: to balance the budget in normal economic times.

As well as lecturing Introductory Macroeconomics this term and hence covering issues mentioned here in greater depth, I’ll also be lecturing a third year course on forecasting, where we will discuss the kinds of methods that are used to produce the kinds of forecasts that underly government budget decisions like these. Many of our undergraduate students take placements and graduate roles with the Government Economic Service, which could see them being placed in the Treasury, hence right in the centre of the process of generating those forecasts. What you are doing here as a student could play a crucial role in shaping the future of our country!

Tis the season?

overseas-aid

You may have seen this graphic, or some similar sentiment, doing the rounds at the moment.

As you may be aware, successive governments have committed to spending 0.7% of GDP on aid to some of the poorest and most needy people around the world. It’s also a tiny amount of money. The plot below makes this clear: it’s a small amount even of the interest the government pays on its national debt, and (not plotted) about a twentieth of what we spend on pensions each year.

Foreign Economic Aid and Interest on National Debt since 1993

So, practically, firstly, stopping this money would make little difference to the government’s overall budget. Bear in mind that the deficit is still much larger than 0.7% of GDP.

Secondly, there are many, many things that the government spends lots of money on that might be better reconsidered if there is a need to cut other things before we spend more money on flood defences (and helping those affected by the floods).

Third, as we’ll learn about this coming term, governments have budget constraints, and if they spend more than they get in tax receipts they run a deficit (as the UK government has done for a long time now), and need to borrow. As such, if something is important (hence has a good rate of return, however measured), and can be financed at a low interest rate (as is the case at the moment), then a better argument is that it should be funded by more borrowing.

Finally:

Challenge yourself, first edition

University is entirely about personal development in all areas of your life. Developing almost always involves having preconceived ideas challenged. This can be a disconcerting experience – things you previously thought to be true you may find are anything but.

As students of economics, your lecturers and class tutors are most likely to do this in the sphere of economic ideas. It’s very easy, too, as there’s a huge range of economic ideas once you start looking, and the internet makes these much easier to come across than ever before. Every economist, or everyone who would like to think of themselves as an economist, can write a blog.

While this presents risks (who are the ones to believe and treat with respect, which ones are we safe to ignore?), it presents huge opportunities. One particular school of thought, much more common in the US than here, is libertarianism. Libertarian economists place a huge amount of attention on individual liberty, questioning the ability of others, and in particular institutions, to make decisions on behalf of individuals.

If you think that needn’t challenge you, it’s worth thinking a bit deeper. That the government sets a minimum wage is an example where an institution (the government) thinks it knows better than firms and individuals about how markets work, and what the right price would be. It impinges on the liberty of a firm to set a wage, and for an employee to accept a particular wage – if it’s below what is legally mandated.

Here’s an article from today on immigration, which is written by a libertarian economist: “Schengen, Adieu” by Alberto Mingardi. It’s written at the blog of the Library of Economics and Liberty, which gives a strong hint that it is libertarian. It asks the question: how do we “control” borders? Can we really think about controlling borders? We probably can if we erect big walls, and employ huge amounts of people to police the border. But we probably also then need to police things inside our country too, in order to make sure that those that have arrived aren’t doing certain things we don’t like (say, claiming benefits, or access to healthcare).

The problem with all of this is that it will impinge on the liberty of those of us native here. We’ll have much more faff and hassle when leaving the country to go elsewhere – for example,longer queues at the border, as anyone who has taken the ferry or Eurotunnel to France will testify. Additionally, we will find much more stringent checks when we do things we used to take for granted. We’ll be asked when applying for jobs to prove our immigration status even though we come from this country and always have.

Employers will have to devote much greater attention to compliance; the University of Reading has to check what its students from overseas are up to, which then eats into the time of lecturers to lecture, and class tutors to teach (and research). Governments have to employ more and more people to police borders and monitor those that enter, causing greater costs and a larger state.

None of this is to say that “controlling” our borders is not a bad thing; clearly nobody wants to have terrorists from overseas entering our country and prowling our streets without any checks taking place. But it’s to say that the controlling will have implications.

And more broadly, it’s to challenge any preconceptions you might have when thinking about immigration, a very real issue facing us at the moment. Should you do this? You certainly should challenge those views if it means you are less likely to support policy proposals that may be ineffective and have a lot of unforeseen consequences.

Government Investment

One common criticism by those sceptical of the role of government is that attempts by governments to influence economic activity suffer from excessive delays. Hence the term “shovel ready” has quickly become part of the political vernacular since the financial crisis and economic downturn in 2008.

Today gives a great example of a project that is anything but “shovel ready”: the expansion of London (and by extension the UK’s) airport capacity. This is basically a decision on whether to build a third runway at Heathrow Airport, and as the BBC article points out, this has been being discussed now for 25 years, and commission after commission have reported on the issue. Nonetheless, the government is about to announce that yet another review is necessary, and a decision that might have been made around about now will instead happen in six months’ time.

Conveniently enough, after the forthcoming London Mayor elections.

Understandably, the Confederation of British Industry (CBI), a group that represents the interests of UK businesses, is highly frustrated by this. Yet further uncertainty on the back of 25 years of uncertainty is something that is unwelcome for business. We’ll cover investment next term, but one thing that is generally cited as a reason for firms choosing to invest is the absence (or otherwise) of uncertainty. Will firms, British or otherwise, choose to invest less in the UK at the moment given there’s still no clarity on whether or not a third runway will be built at Heathrow?

Further Reflections on the Autumn Statement

Here’s an blog post at a blog I regularly read: “So what has happened to the long-term plan, George?” It’s another set of reflections on last week’s Autumn Statement, adding in the current fiasco surrounding the Labour Party.
The Chancellor put off cutting the deficit based on a better than expected forecast of government revenues at last week’s Autumn Statement.
That decision probably won’t have great consequences – although it does raise questions of consistency, since as the blog article points out, the Prime Minister and Chancellor have long made the point that Labour didn’t “fix the roof while the sun was shining” back before the financial crisis.
The point it makes though is that weak oppositions, as Labour is currently providing to the Conservatives, allow potentially lazy, or complacent decisions to be made, which could have economic consequences.
I’d highly recommend the Political Betting blog that this article was motivated by; it’s a very interesting take on politics from the perspective of people who regularly place bets on political outcomes. The placing of bets is an economic decision, and many argue it’s an effective way of forcing rigorous thinking: if one’s money is at stake, one will be more conscious of potential biases that would result in betting losses.

Evidence? Who needs evidence…

Economics is an “observational science”. What does that mean? It means that, by and large, its something we observe rather than something we recreate in the laboratory under controlled conditions.

Why does this matter? Because it makes strong statements about what caused what more difficult. If we can’t be sure that something else didn’t cause what we’re looking at, then that casts doubt on our proposed explanation.

This is perhaps most acute in the area of public policy, particularly when it comes to the macroeconomy. Earlier in the week the Chancellor of the Exchequer (in charge of fiscal policy) was able to make a lot of concessions to a lot of people because of better than expected growth (that’s expected to happen). But is that better than expected growth due to great fiscal policy since 2010 (as some might argue), or due to more favourable other factors (less austerity than the government wanted to do since 2010)? Or something else entirely – better growth in our trading partners? The answer to this question matters a lot, since it tells us what fiscal policy would be more effective.

It’s always interesting to draw parallels with other fields, particularly when things are topical. As you’ll be aware, at the moment there are reforms being proposed for the NHS – namely to turn it into a seven-day service from its current (supposed) non-seven day service. A huge amount has been written and said and shouted about this, but the bottom line is if you’ve ever been into hospital on a weekend you’ll know that the NHS does indeed function on weekends.

As such, the argument has switched to whether it’s more risky to have been admitted on a weekend. Two studies have been relied upon, but the problem is that these studies are based on observational data. A comment published two days ago by the British Medical Journal (BMJ) says:

1. This is an observational study and cannot determine causation.

This is, alas, true. We cannot determine it. We can have a bloody good go at it, nonetheless, and you’ll learn a lot in econometrics about how we can go about this. But we cannot determine it, we can only be sure of it to some degree of confidence – usually 95%.

This doesn’t nullify the use of economics as a field of study, nonetheless – there’s a lot we can understand much more clearly via further study – but it is important to keep this in mind when studying economics…

Fiscal Plans and Fiscal Outcomes: The Importance of Forecasting

Next term we’ll learn about the difference between fiscal plans, and fiscal outturns, or outcomes. Fiscal plans are the ones set out today by the Chancellor in his Autumn Statement. Fiscal outturns are what we’ll see over the next four years.

Probably the most spectacular differences between plans and outcomes come when recessions come unexpectedly, like with the 2008 financial crisis which put paid to Gordon Brown’s Golden Rule (not borrowing for current consumption over the “cycle”). The outcomes, as we all know, were very large deficits, up to 10% of GDP.

What is perhaps most striking is that for all the anticipation of where the cuts would fall, instead the news is all about what cuts didn’t happen: tax credit cuts cancelled, police, international development, healthcare and defence budgets all protected, with a list of additional goodies thrown in.

How was all this possible? Without resorting to cynicism about politicians dressing up the good news and hiding the bad news (hint: local government and various tax rises hidden in the small print), this Guardian analysis makes it clear what changed: an upward adjustment in forecasts for growth and hence tax receipts.

The idea is this: as the independent Office for Budget Responsibility provided a very positive forecast for growth and hence tax receipts (we pay more tax when we earn more and spend more), this meant that in order to keep to his fiscal plans to eliminate the deficit, Osborne had to do much less – growth would do the hard work for him.

But the main point is this: all of this is based on economic forecasts, rather than actual events – it’s plans, not outcomes. We have to wait until 2020 to see what the outcomes are like. It shows just how hugely important economic forecasts are, however – and why you should think about taking my forecasting module when you get to your third year 🙂

Spending Review

As discussed in the Conversations session recently, today is the Spending Review. As this article suggests, the Chancellor is going to indicate spending on housing.

It’s a curious aspect of the political climate that at the same time that huge amounts of cuts need to happen (including to infrastructure investment since the Fiscal Charter doesn’t exempt that), still the headline is about a pledge to spend more on housing.

In addition, there’ll apparently be £3.8bn more for the NHS, and more on defence given the recent crises, while schools and international development can’t be touched. Which leaves a lot of cuts to fall in other areas. The BBC states that “These include local government, the Ministry of Justice and the Home Office, with police forces expected to face more cost-cutting.” Which will surely lead to protests by police officers – perhaps exemplifying why it is incredibly difficult to cut government spending…

We’ll come back to this in fiscal policy later in the Autumn Term…

Borrowing… again

News today is that government borrowing for the month of October was the highest it has been for six years.

Borrowing like this contributes throughout the whole year to the deficit – the gap between government receipts (taxes, mainly) and government spending.

As you’ll be well aware given the recent passing of the Fiscal Charter, the government is set on austerity and on running a budget surplus – by 2019/20. So it’s not too much of a problem with regard the Charter that borrowing is up, but it nonetheless shows the difficulty of getting government spending under control.

Not least, various parts of the NHS are running large deficits, Network Rail projects (in and around Reading) are showing eye-watering overspends, and probably biggest of all, pensions continue to rise at 2.5% even while inflation is at -0.1%. The first two are symptomatic of the difference between fiscal plans, and fiscal outturns – things don’t always happen as expected and can impact government finances as a result.