Monday, December 3, 2012

Economics Help Update 3rd December


As the UK chancellor panics about missing his deficit reduction targets, we look at one of the mysteries of modern macro economics - Why Can Japan Borrow so Much?

Over the past two decades Japanese government debt has risen to 229% of GDP - and yet bond yields have continued to fall.


Source: Hoshi and Ito (2012).
Spain, for example, might feel aggrieved that they face rapidly rising bond yields – even though their public sector debt (70% of GDP in 2011) is considerably lower that Japan. (UK is close to 70% of GDP too) There are quite a few reasons to explain this fall in Japanese bond yields, such as:
  • Deflation in Japan - makes saving at low interest rates attractive.
  • High level of domestic savings. 95% of government debt is held by domestic savers
  • Central Bank intervention to buy bonds and maintain liquidity.
But, with ageing population and declining saving ratio in Japan, the era of ultra low interest rates could be coming to an end. It could be very bad news for Japan, where interest rate costs already account for 23% of federal budget.

More on why Japan can borrow so much?

Current Account Deficits

oecd-changes-current-account-2008-12

The UK now has one of largest current account deficits in OECD. The German current account surplus is largest in world (overtaking China)


In a word, yes. It is a major problem for southern Europe, struggling to grow.

Outlook for Pound in 2013

The Pound has had a relatively good year in 2012 - a modest appreciation. But, this is a reflection of the underlying weakness in the rest of the world - and not strength in the UK.
euro-pound-spot-07-12 

The continued Euro crisis could mean the Pound continues to appreciate against the Euro. But, given size of UK current account deficit, overall the pound is starting to look overvalued.

Benefit Fraud and Tax Evasion

Just to put into perspective:
  • In 2010/11 – benefit fraud was estimated at £3.4bn – 2.2% of total benefit expenditure (£154bn)
  • Tax evasion and tax avoidance estimated at £125bn 
  • Cost of tax avoidance and benefit fraud

 Italian Economic Decline

Real-gdp-growth-93-12

Not many would have put UK as 2nd fastest growing economy 1993-2012.

Italy is becoming the sick man of Europe. - Despite the largest primary budget surplus.

  1. Falling productivity
  2. Declining competitiveness
  3. Corruption and bureaucracy
  4. Ageing population
  5. Austerity giving no room for growth.

Readers Questions

Graph of the Week

net migration into UK

In 2011, long-term net migration into UK was +215,000 –  down from over +250,000 in 2010. It means that in the past five years, the UK population has been boosted by net migration of around 1,000,000.

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