Macroeconomics: UK economy, IB Economics

The Liberal Democrats have proposed a direct cash transfer of £300 to households whose mortgage payments have risen by more than 10%, to be funded by reversing a recent tax change on banks. Apart from the fact that they'll never be in a position to implement this scheme, it merits a look.

Apart from the obvious opportunity cost, I'd worry that such a scheme would encourage people to take out mortgages that really stretch them - and thus introduces a degree of moral hazard to the market. However, the fact that it seems that policymakers are increasingly considering direct cash transfers, although I don't know whether there any restrictions on how they might spend it, is also noteworthy.

This is an interesting article by Simon Jenkins, arguing that the government must compensate those firms struggling as a result of Brexit.

He compares such support to compensation for businesses hurt by lockdown. However, I'm going to go out on a limb, and suggest that there's a fundamental difference. Most of those people suffering as a result of Brexit voted for it. Does this mean that such support would be an example of moral hazard, I wonder?

The government has sought to assuage criticism of its support package for business by simplifying the process by which small firms can apply for 100% state-backed loans up to £50,000 in the hope of sustaining more small businesses and overcoming a backlog of such applications.

It's quite a bold move, but stops short of 100% guarantees for all businesses - and proves that Mr.Sunak took on board what he was taught about the issue of moral hazard by the esteemed Michael Fontes, in that the Chancellor is unprepared for the taxpayer to underwrite all loans to businesses, even at this time.

Interesting reflection on the troulbes facing Flybe, with lots of good economics here. The deferral of Air Passenger Duty (APD) appears to be one option that the government is considering as a way of saving the airline, not least because it doesn't infringe EU rules on state aid - of course, Leavers will cite this an an example of why this is a good reason for being out of the EU. The reality is that interventions, such as this are rarely based on good economics.

This fact is reflected in the concept of moral hazard, mentioned by Simon Jack, and you should be aware of the concept, and how it applies in this instance. However, my overriding impression is that it's manifesto pledges, not economics that are driving the formation of policy in this instance.

And this is why the Guardian carries its editorial - whereas previously the government was committed to removing the 8% banking surcharge levied on top of corporation tax, the new Chancellor has not commented on the matter.

As a result, bigger institutions could find themselves paying £4bn more in tax,  something that they wouldn't have expected to do under City-friendly Chancellor, Kwasi Kwarteng.  

Another controversial bailout story that will get you thinking. The owners of P&O, DP World (Dubai Ports World) have asked the government for a bailout worth £150m to keep the ferry operator in business, and see it through the coronavirus lockdown., having furloughed 1,400 staff.

And yet, it's also due to pay out a dividend of £270m to shareholders this week, and last year it made a profit of £1bn on revenues of £6bn. Surely the former suggests that the taxpayer is underwriting risk at a time when the shareholders should be? And to overlook this implies turning a blind eye to some unsavoury distributional implications. Equally what has happened to the rest of the £1bn profit?

It will be interesting to see what the government does. After all, we are an island nation and dependent, not only on the seas, but also DP World who operate two of Britain's largest ports, at London Gateway and Southampton, not that the Foreign Secretary could be expected to know.

A left-leaning thinktank, Common Wealth, raises an interesting point about the government bailout. In the period 2011-18, UK companies paid out nearly £400bn in dividends, implying that had they not done this, they would have been better placed to weather the pandemic. 

And there's something in this: share ownership comes with risk, as does entrepreneurship more generally, so some are concerned that the extent of government intervention is another example of moral hazard, whereby business is happy to profit in the good times, and abrogate the risk in the bad times. That said, these are remarkable times.

However, small businesses might also argue that there's a distributional issue here: might it not be that large firms who pay dividends to shareholders are unfairly advantaged, in that their collapse means that they have easier access to bailouts? There's certainly lots to ponder.

Yesterday's big story - with lots of different angles. Perhaps the biggest is the negative multiplier effect that will be associated with the collapse of British Steel. But, if you've been following my coverage, there's a lot to think about in relation to the prospect of government intervention, and the economics of that.