No 252: Day of Strikes but more Inflation?

HALF a million workers are on strike today in the UK. It involves state school teachers, university lecturers, civil servants, train drivers and bus drivers. Although NHS workers like nurses and ambulance drivers have been striking recently, they are not today. (See this BBC article for further details about today's strikes.)

It is striking (haha) that most of these workers are public sector employees who are therefore directly negotiating with the government. These workers argue that their wages have not been keeping up with inflation ever since 2010, when the government of that time initiated "austerity policies" - spending cuts (including freezes on pay rises to state employees) to pay back the government borrowing to relieve the 2008 financial crisis. Recent high inflation has of course made the real wage situation even worse for these workers.

The government says it cannot award large pay rises because it does not have the money, and because such wage rises will only add to inflation, thereby only serving to make the economy worse.

Certainly government finances are not in a strong position - as stated in an earlier post, public sector borrowing in December was the highest for that month since it began being recorded. But if these pay rises were awarded, would they be inflationary?

Any extra income for households is likely to lead to additional consumption. As we know from our lessons, the resulting shift on AD would create a higher price level but we also know it also leads to more real GDP - which is something else the UK does need quite desperately.

But the government is not talking about this "demand pull" inflation. Instead it arguing that pay rises will lead to a "wage-price" spiral. This is when firms have to raise their prices due to having to pay higher wages. However the higher prices then mean workers want higher wages again, and if they are given them, firms will once more have to raise prices, and so on and so forth. It all results in higher and higher rates of inflation.

We could picture this on a diagram as a series of inward shifts of SRAS. As well as the higher and higher price level, paying more wages would either force some firms out of business or force others to cut their workforce - leading also to lower GDP. This then is definitely a situation to be avoided!

 But I would argue it is not the current situation. Remember that many of the workers striking today are public sector workers. If government has to pay higher wages to, for example, teachers, it does not follow that it will then put up the "price" of education - since state school education is free (at least at the point of use). It would be same for other government workers, including those in the NHS.

There is no doubt it would be hard to find the money to fund these public sector wage rises. But it would seem the inflationary impacts may not be as high as the government claims. Having read this,  next time you are having a conversation with a government minister you can say, "I think you are exaggerating the impacts of the wage-price spiral, which does not really apply to public sector pay rises...." :)

No 248: Record December UK Government Borrowing

IT has just been announced that UK Government borrowing in December was £24.7 billion - the highest ever for December in the 30 years since modern records began.

One reason for this is the financial support beging given to households and businesses for the energy bills. Another is from the jump in government interest rates caused by the disastrous economic policies of the Truss administration (so much damage in less than 2 months in power!).

The implications for future increases in government spending are serious. At a time when there are pressing needs for more funding for the NHS and higher wages for government workers, how much is going to be possible given these already extremely high amounts of borrowing?

An important topic too for your Economic studies, so take the time to read this:

https://www.theguardian.com/business/2023/jan/24/energy-support-uk-government-spending-interest-payments?CMP=Share_AndroidApp_Other

No 229: OBR forecasts likely to show £60bn-£70bn hole after Kwarteng’s mini-budget

 USEFUL for all of us, but particularly for Upper Sixth students just starting to look at Public Finances in their Macro classes, is this article from the Guardian: https://tinyurl.com/mr3dnmt8 

It is important to understand what is meant by a "hole" in the finances. This does not mean there is an extra £60-70bn of borrowing planned; it actually means that the government provided figures might not actually add up, with £60-70bn for which no information has been given yet.

Here is a key quotation from the article that summarises the government's options:

The government's response would be that none of these measures might be necessary, if their actions lead to the 2.5% economic growth they are aiming for. Achieving this growth target therefore has huge significance for not only improving the government's finances, but also in determining the political future of the Truss administration.

No 226: The Bank of England Comes to The Rescue!

 IN a very uncommon move, the Bank of England has committed to spending £65 billion over the next two weeks in the UK Bond Market, in order to counter the effects in the market since the mini-budget last Friday. 

As one Conservative MP said (albeit someone who is not a Trussite), “The Bank of England is saving the UK economy from the policies of the UK Government.”

Since the mini-budget on Friday, which announced tax cuts without any clear indication of how these would be paid for, interest rates on UK Government borrowing lept from around 1% in January to nearly 5% yesterday. This is due to lack of confidence in the government’s policies.

The first few paragraphs of this article (https://news.sky.com/story/bank-of-england-takes-action-to-restore-orderly-market-conditions-after-mini-budget-panic-12706827 ) explain what the Bank of England did yesterday:

“The Bank of England has launched a temporary bond-buying programme as it takes emergency action to prevent "material risk" to UK financial stability.

It revealed that it would buy as many long-dated government bonds as needed between now and 14 October in a bid to stabilise financial markets in the wake of the mayhem that followed the government's mini-budget last Friday.

In addition to the plunge in the value of the pound, it has also seen investors demand a greater rate of return for UK government bonds - essentially IOUs.

That is because the level of borrowing required to fund the government giveaway, including tax cuts and energy aid for households and businesses, shocked the market which  government giveaway, including tax cuts and energy aid for households and businesses, shocked the market which immediately questioned the sustainability of the government’s finances.”

This article (https://www.theguardian.com/business/2022/sep/28/what-bank-of-england-doing-pound-dollar-uk-economy-interest-rates-bonds?CMP=Share_iOSApp_Other ) has a good more advanced explanation of the aims of the Bank of England’s actions.

No 225: Useful place to see live market data

 IF you want to see live changes in stock markets, exchange rates, bond rates etc (and who doesn't in the current economic situation), this has a good dashboard: https://www.marketwatch.com 

You can also click through to see charts. For instance here is the "Rates" dashboard which tells us about different interest rates governments are having to pay on their 10 year bonds:

If you click on a certain country's bond, you get more information including charts. Of course, what we all want to see at the moment is what's happening to UK government borrowing:

It's going up today, but it is even more striking to see what's been happening just in the last five trading days.

As you can see, the rate has increased by almost 1% since last Tuesday.

If you want to know why this is happening, read this previous post: 

https://spoteconomics.blogspot.com/2022/09/no-223-ers-irs-government-borrowing.html 

No 224: Varieties of Opinion on Friday's Mini-Budget

 AS could be expected, the mini-budget announced on Friday has proved to be divisive amongst economists. Basically, it has been welcomed by free market economists and criticised by interventionists. 

This (https://tinyurl.com/8nuyes9b) contains several short reactions representing views across what the article calls the "great divide" (from the Daily Telegraph, Daily Mail, Nigel Farage, the IEA, the FT, Daily Mirror, past officials from the Treasury and US Fed).

It is important for your own development as economists to weigh up these different viewpoints and to decide which of them you think is most justified.