Archive for May, 2015

UK households enjoy £125bn “tax break”!

May 27, 2015 30 comments

Via Mr. Worstall, the Guardian reports on a “shocking discovery”, that landlords pay tax on their profits rather than revenue:

Landlords are allowed to deduct a wide range of expenses, on top of mortgage interest costs, before they have to pay tax on their rental income. These allowable expenses include the cost of insurance, maintenance and repairs, utility bills, cleaning and gardening, and legal fees. Ordinary homeowners are not entitled to similar privileges.

The idea that “ordinary homeowners” do not enjoy the “privileges” of landlords in the tax system is wrong; in fact the opposite is true.  Owner-occupation is slightly favoured over rental, since the imputed rent of the owner-occupier is tax exempt, whereas the actual rent received by landlords is taxable income.  In addition, capital gains are taxed for landlords and tax exempt for owner-occupiers (with some minor caveats).  That’s just taxation: the long list of direct government subsidies for residential mortgage lending surely further skew the balance of subsidy towards owner-occupation; an NAO report from March 2014 lists (Figure 2) six different schemes since 2006, and then we could move on to bank regulation, and so on.

The ONS estimates owner-occupiers’ imputed rent at £125bn in 2014, so perhaps a more accurate (though still nonsense) headline would be that homeowners receive a “£125bn subsidy” over landlords?  I suppose that wouldn’t fit as neatly into the standard Guardian workers vs capitalists zero-sum narrative.  I highly recommend Chapter 16 of the Mirrlees Review for a thorough discussion of land and property taxation.

The “Generation Rent” group (who claim to campaign on behalf of renters) seems to be firmly embedded in the long tradition of completely insane British housing market policy, proposing in their manifesto both rent controls and the extension of a weak form of “Right to Buy” to the entire private rental sector.  They are a reliable source of silly quotes in any article about the housing market, this time coming up with:

“The tax system also puts landlords at an advantage over potential owner occupiers when competing for the limited supply of houses and it’s those thwarted first-time buyers who end up paying off the mortgage anyway in rents. “We need to stop subsidising property investment and use that money to build more homes instead.”

We need to stop subsidising investment in property… so we can invest more in property?  A cunning plan.

Categories: Mythbusting

What Would Irving Fisher Say?

May 19, 2015 1 comment
UK in "Deflation".  Source: ONS, Quandl, Nationwide.

UK vs “Deflation”. Source: ONS, Quandl.

If you compared two periods:

1) Period One, where nominal asset prices fell 15%, nominal incomes fell 4%, the labour market was contracting sharply … oh, and the CPI rate was usually above 3%.

2) Period Two, where nominal asset prices are at all time highs, rising 5-10% p.a., nominal incomes are rising 3-4%, the labour market is expanding rapidly… oh, and the CPI rate was slightly negative.

… which period would you call “deflation”?

Categories: Data, Inflation

The hidden 2011-2 “investment” boom?

May 18, 2015 12 comments

To keep my comment section happy, here is some “productivity scepticism”.  I like this theory from Paul Donovan of UBS discussed in a Guardian article, here quoting Donovan:

“In 2000, 32% of UK businesses were employers. By 2014, 24% of UK businesses were employers. This raises the obvious question of what on Earth 76% of UK businesses were doing if they were not employing anyone – and the answer of course is that they were single person businesses where the owner was the sole person ‘on payroll’.

This matters for capital spending, because people setting up as self-employed – for example, as a consultant – may well make little or no upfront investment in kit. Says Donovan:

“If you are a self-employed consultant, you probably already have a laptop, have a car, have an office at home. As the boundaries between home and work blur, we are making better use of the capital we have got.”

“What this means is that investors looking for a “capex recovery” may be missing the point. The secret capex story may be that businesses make better use of non-business assets, and that part of the capex cycle … masquerades under a ‘retail sales’ pseudonym.”

One of the puzzling parts of the UK productivity puzzle is the divergence of employment and output during late 2011 through 2012, when output barely grew and employment soared.  If output and employment are both growing we can use the “low-skilled labour supply shock plus composition effect” theory to explain slow average productivity growth, but that doesn’t work well for this period.

We can (partially) resolve this problem by revising up 2011-2 real GDP, and Donovan’s theory could help here.  2011-2 saw a self-employment boom; if capital investment by the self-employed shows up only as consumption, or not at all, then measured GDP was too low.  The recovery in household consumption of durable goods has been much stronger than total consumption, up 19% from 2008 Q1 to 2014 Q1 versus 2% for the latter.  One of the upcoming ONS methodology changes is to remove a £500 lower bound on what counts as capital spending in the business investment survey, perhaps this will help.

UK Self-employment vs Durable Goods

UK Self-employment vs Durable Goods.  Source: ONS MGRQ , UTID

File under “grasping at straws” if you prefer.  There are good reasons to be sceptical there is any significant bias in measuring GDP, and other survey indicators (PMIs etc) suggest the 2011-2 quasi-depression was roughly that.  Stories about the unemployed being pushed into “false” self-employment could make us doubt the jobs data instead, though again it would be surprising if that was sufficient to explain such a large shift in the labour market surveys.


Categories: Data, Productivity

2015 Q1 wages update (or, there is not much inflation)

May 13, 2015 6 comments

What do you expect to happen with a 2% inflation target, if productivity growth falls from 2% per annum to 0% per annum?  You expect tight money.  Nominal wage growth must be pushed down from 4% to 2%.  If nominal wages are sticky you’ll need a nasty blast of unemployment to achieve this.  But the labour market will adjust eventually to the new equilibrium.  This is the EARN08 table which tracks one measure of nominal hourly wages, updated today, steadily tracking below 2% average growth since 2009.

ONS Nominal Hourly Wages, "EARN08" table.

ONS Nominal Hourly Wages, “EARN08” table.

Alternative view using nominal weekly wages, with the arrow highlighting that dangerous inflection point in Britain’s inflationary wage/price spiral which prompted Carney and other MPC members to insist last year that Bank Rate would soon rise:

Nominal Private Sector Average Weekly Wages.  Source: ONS

Nominal Private Sector Regular Weekly Wages. Source: ONS KAI7

Of course everybody knows that productivity growth will pick up to 2% per annum again, slash return to the pre-crisis trend, and then wages will rise 4% per annum again, slash soar into the heavens, and everything will be just fine.  See also, Bank of England productivity forecasts today.

Welcome to Britain, have a nice day!

Update on that supply shock

May 13, 2015 Leave a comment

An update on a previous post.  Independent forecasts for UK real GDP growth in 2015 are exactly the same as before the oil price collapsed.  From HM Treasury’s collection of forecasts from last month:

HM Treasury Average of Independent Forecasts, April 2015.  Source: HMT

HM Treasury Average of Independent Forecasts, April 2015. Source: HMT

The median real GDP forecasts from the Bank are now slightly lower than August last year, when the oil price was above $100.  Carney claimed there was an “unambiguously positive” effect of falling oil price… doesn’t look that way.  Even if the falling oil price lowered forecast unemployment – not impossible as before, go from lower forecast inflation to less tight monetary policy to jobs – there has been an offsetting negative drag on expected output – maybe losing more jobs in the North Sea?

BoE Median Forecast for Real GDP Growth

BoE Median Forecast for Real GDP Growth. Source: BoE

Categories: Bank of England, Data

Are we nearly there yet? (redux)

May 13, 2015 Leave a comment

As usual it doesn’t take long for the OBR employment forecast to look too low.  Labour market data covering the three months to March out today:

UK Total in Emplomyent, OBR Forecast & Trend, Outturn

UK Total in Emplomyent, OBR Forecast & Trend, Outturn. Source: ONS MGRZ, OBR Budget 2015 EFO

Employment has hit the OBR’s estimate of trend employment.  I’m not sure if this is a first, due to the ONS revision to population estimates last year, the current labour market data is not comparable with old OBR forecasts.  Another upward revision to the OBR’s trend seems not unlikely.

Hours worked are slightly weaker than forecast.  It’s going to be interesting to see what happens to average hours.  The OBR thinks the rise in average hours since 2010 is a cyclical blip in a structural downward trend.  We’ll see.  If welfare reform is driving up average hours, and is one of the reasons that average productivity is not growing (due to a composition effect), let’s hope the OBR is wrong on this too.

Average Hours, Forecast vs Outturn

Average Hours, Forecast vs Outturn. Source: ONS YBUV, OBR Budget 2015 EFO

Categories: Data

Bank of England forecast error

May 8, 2015 7 comments

Or, the guv’nor at least.  The Guardian on Mervyn King circa early 2010 on the Tories circa 2015:

“I saw the governor of the Bank of England [Mervyn King] last week when I was in London and he told me whoever wins this election will be out of power for a whole generation because of how tough the fiscal austerity will have to be,” Hale said in an interview on Australian TV reported by Reuters.

A little indifferent to the headline result here, but sad to see so many true liberal voices leaving Parliament.  You’ll be missed, Vince.

Categories: Politics