Finance Matters

Posts Tagged ‘economic growth’

There are few things Americans hate more than taxes.

Likewise, many Americans believe lowering taxes is a panacea for what ails the nation.

But a recent study shows that idea might need to be reevaluated.

Writing on the Social Science Research Network’s website, Filip Spagnoli, a statistician at the National Bank of Belgium, did a simple plot of GDP against various measures of taxation.

His results are pretty convincing; the lines do not exactly move in lock-step.

Here’s U.S. capital gains rates vs. GDP:

Next, U.S. tax brackets and GDP:

And finally, straight marginal rates vs. GDP:

As Spagnoli writes, the absence of correlation does not necessarily prove causality (which of course holds true for the presence of correlation).

But it certainly casts doubt on the received wisdom of many.

The paper is title There’s No There There: Low Tax Rates and Economic Growth.

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The UK economy is expected to contract by 0.4 per cent on an annualised basis in the first three months of 2012, according to the Organisation for Economic Co-operation and Development (OECD).

This represents a contraction of 0.1 per cent compared with the final quarter of 2011 and means that the UK is returning to recession.

UK output declined at an annual rate of 1.2 per cent in the final quarter of 2011, according to the OECD, a Paris-based think tank which promotes policies that improve people’s economic and social well-being.

The organisation expects the UK to be the second slowest economy to recover in the first half of 2012, with only Italy taking longer to return to growth.

In contrast Germany and France will grow at a significantly faster pace than the UK in the 2012 first half, but their growth will slow down as the year ends.

Figures from the Office for National Statistics were also pessimistic, showing UK output falling by 0.3 per cent in the final quarter of 2011, rather than 0.2 per cent as previously estimated.

Shadow chancellor Ed Balls is urging the government to slow down its programme of spending cuts and tax increases, action which the OECD suggested in 2011 in order to combat slower than expected growth.

The OECD has also highlighted an increasing gap between European and North American economies and is calling on policy makers to continue their efforts to sustain recovery.

Pier Carlo Padoan, the OECD’s chief economist, said: “Substantial risks remain in the euro area

“Confidence is low, [bond] yields remain high and lending activity has weakened recently.

“So in spite of positive action [from the European Central Bank], more needs to be done to boost growth and sustain the recovery.”

Delivering his third Budget, Chancellor of the Exchequer George Osborne, said that it would help those who aspired to do better for themselves and for their families.

‘Britain is going to earn its way in the world’ he said.

He promised far reaching tax reform, creating a system that was simple to understand for ordinary taxpayers and more competitive for business.

More specifically, the Chancellor confirmed the news leaked yesterday that the 50p top rate of income tax, which is paid on earnings over £150,000, will be cut to 45p from April 2013.

Other taxes on wealth will be introduced and along with measures to curb tax avoidance, these are expected to raise five times as much as the 50p tax rate.

The top rate had been expected to raise £3bn, but it has raised just a third of the expected amount and is believed to reduce competitiveness.

For low-earners, the Chancellor announced an increase in the income tax allowance to £9,205.

Mr Osborne revealed positive news on the economy, with a slight increase in the growth forecast for the UK economy this year from 0.7% to 0.8%

However 2 per cent growth is expected in 2013, slightly lower than earlier forecasts of 2.1 per cent.

The Chancellor announced that the government is on schedule to reduce the UK’s deficit by 2016/17 and that the Independent Office for Budget Responsibility believes the country will avoid a ‘technical recession’.

There will be a larger than expected cut in corporation tax to 22p over the next three years, to help attract foreign investors.

Prior to the Budget, the Office for National Statistics revealed that Britain’s budget deficit almost doubled in February to £15.2 billion due to lower tax receipts and an 8.3 per cent increase in spending.

The global shipping industry is warning of another tough year as signs indicate that China’s economic growth is slowing.

The British Chambers of Commerce (BCC) expects the UK economy to grow more slowly than previously forecast and says it faces “serious challenges”.

In its quarterly economic forecast the BCC forecast growth of 0.6 per cent in 2012, a slight decrease from its previous forecast of 0.8 per cent.

It expects the government’s efforts to reduce debt levels, which are still too high, to depress demand and lead to a longer than expected period of low growth.

However the BCC does expect the UK to escape falling into a double-dip recession.

The group expects unemployment to rise from 2.6 million currently to 2.9 million at the start of next year.

Nearly a quarter (23 per cent) of young people between the ages of 18 and 24 are expected to be unemployed.

The BCC has called on the government to produce a budget that will encourage firms to export, invest and grow and it wants a planned 5.6 per cent increase in business rates to be scrapped.

The BCC’s director general John Longworth said: “The UK economy faces serious challenges, with problems in the eurozone creating difficulties for exporters, combined with dampened domestic demand”.

Interest rates are expected to remain at 0.5 per cent until late next year, after which they will increase slightly.

Economic growth is expected to increase to 1.8 per cent in 2013.

There was better news from the Markit/CIPS construction index, with the February reading increasing to 54.3, from 51.4 in January.

With figures over 50 representing growth, February’s result is another indicator that the economy may escape a double-dip recession.

Demand increased for house-building, commercial construction and civil engineering during the month.

Markit economist Sarah Bingham said: ‘The improved performance of the construction sector adds to other positive data released on the UK economy’