Donald Trump: The King of Debt [Video]

Donald Trump, the Republican nominee for President of the USA, is pretty outrageous at times. What he says about the economy, national debt and borrowing doesn't help him either. 

Mythbusters: Brexit Edition

People have been clouded by scaremongering that has prevented us from getting to the real debate of Britain's EU membership, says Matt Walton. Today, he seeks to set the record straight on this key issue.

The debate surrounding the economic implications of Britain leaving the EU has so far been dominated by both sides trying to outdo each other in terms of scaremongering. “Brexit could cost £100bn and nearly 1m jobs” say the EU-funded CBI one week. “EU policies threaten to cost Britain £9,265” says the IEA the next. It is perhaps no wonder that many voters feel a little bit unsure about who to trust. The announcement this week that the government would spend £9.3 million on a pro-EU leaflet to every household meant that they had another organisation to add to that list of scaremongers. In this piece, I will attempt to draw together the economic arguments for Britain to leave the EU while rebutting some of the outlandish claims of the ‘In’ side. Before starting, however, I have a slight admission: My main motivation for wanting to leave the EU is not economic, but rather democratic. I fundamentally believe that we must leave so that we can hold those who make our laws accountable. However, given that this is an economics blog site, I will focus on the potential economic benefits which this country could enjoy.

Naturally most of the economic arguments surrounding the debate concern Britain’s trading relationship with the EU if we vote to leave. Trade is what the EU is all about after all, isn’t it? Campaigners on the Remain side have said that Britain would struggle to negotiate a favourable trading arrangement if we leave. That Britain is a relatively insignificant market for the EU and it would therefore be the EU which dictates the conditions of the deal, not the UK. This is incredibly misleading. Firstly, on the day that we vote to leave the EU, we become the EU’s largest export market for goods. Moreover, we currently export goods and services to the EU to the value of £228.9 billion per year whereas we import £290.6 billion of their goods and services (2014 figures). This means that we have a trade deficit with the EU of £61.7 billion. At a time when the EU struggles to shake off the remnants of the Euro crisis and when growth is still sluggish, can you imagine any desire on the EU’s part to forfeit this huge source of income?

Let’s suppose, however, that Britain does not reach a trade deal with the EU. A worst-case scenario, where the EU member states close ranks and say: “We won’t give you a trade deal, if you’re out you’re out.” Aside from being a particularly unlikely outcome, it’s also not a particularly damaging one for the UK. In this situation, the UK would revert to the rules of the World Trade Organisation (WTO). WTO rules dictate that tariffs on most goods must be between 1% and 3%. Let it be reminded that this is the minimum standard. In other words, almost negligible. The only areas where this is not the case is a) cars and b) agricultural products. 

But any tariffs the EU imposes on Britain will be matched by equivalent UK tariffs on EU products. Who makes wine and cars? Answer: the Germans and the French – the two countries who dictate EU policy more than any others. The German car industry alone, would be at risk of facing reciprocal UK tariffs on the £16 billion market for German cars in the UK. Almost 1/3 of the new cars sold in Britain come from Germany. You can be sure that, if we vote to leave, the heads of BMW, Mercedes, Volkswagen and the rest of the hugely successful German car manufacturers will be in Angela Merkel’s office the next morning saying “We need tariff-free access to the lucrative British market.” It is inconceivable, therefore, that a trade arrangement between the UK and the EU would not be reached.

If countries like Norway and Switzerland can prosper outside
of the EU, why not Britain?

“But”, cry those who want to stay in, “you won’t have access to the Single Market.” This is a valid point as far as the Single Market in terms of goods is concerned, yet our economy is not primarily goods-focused. David Cameron, in a column urging people to vote ‘In’, has claimed that 80% of our economy is made up of services. Though as he well knows, there is currently no Single Market for services. So the Single Market argument which he and others perpetuate cannot be relevant to the UK’s situation. Non-EU Switzerland, which supposedly doesn’t have access to the EU’s services market, exports five times per capita more to the EU than we do. If countries like Norway and Switzerland, two of the world’s richest and happiest nations, can prosper outside of the EU, maintaining friendly relations and trading with the bloc, without being subject to its constant over regulation, why not Britain?

Another argument peddled by the Remain camp is that British jobs would be at risk if we voted to leave. Their favourite figure to use on this comes from a report compiled by the National Institute of Economic and Social Research (NIESR) in 2000 which suggested that around 3 million jobs in the UK are linked to our trade with the EU. The methodology behind this is fairly simple to understand.  The UK’s exports to the EU are equivalent to 13% of our GDP. Thus, claim the researchers, it is logical to assume that 13% (3 million) of British jobs are linked to our trade with the EU. The operative word here is linked, however. The NIESR explicitly acknowledged that "there is no a priori reason to suppose that many of these [jobs], if any, would be lost permanently if Britain were to leave the EU." Plus, if you use the same back-of-the-envelope-type calculations for the EU, you find that between 5 and 6.5 million jobs on the continent are linked to their trade with the UK. Thus a trade deal with the UK would be imperative for job security in both countries.

I want to move away, however, from criticising the arguments of the ‘In’ side. Instead, let me spell out a more positive vision for Britain’s economy after we leave. After the 2 year negotiation period set out in the Lisbon treaty, and Britain is freed from the EU’s Common External Tariff, we will have access to world prices. These are typically 8% lower than prices in the EU. As a nation with a particular preponderance for imported goods, this will be a noticeable shift. The move from EU prices to world prices will mean that the cost of food and household goods will fall. Furthermore, this means that British firms will have access to cheaper factor inputs. The only result of cheaper inputs is that we, as a nation, become more globally competitive.

A departure from the EU’s protectionist external tariff wall will not just help the UK though. Currently African farmers, some of the most impoverished businesspeople on the planet face EU tariffs of 7.5% on roasted coffee and 30% on processed cocoa products, two of the continent’s major exports. Think what the removal of this barrier, at least on the UK’s part, will do for those same farmers. Tariff-free access to the UK market, the 5^th biggest economy on the planet, can only make them richer.

 

One of the most frustrating things which I am hearing as the referendum approaches is that people “don’t know the facts” or that “they haven’t been told enough about it” – the inevitable result of media and government hysteria most likely. You each have, at your fingertips, possibly the most useful research tool in the history of humanity: the internet. If you are undecided or wanting more information about the referendum, it can be as simple as watching a YouTube video, reading a newspaper column or watching Question Time on Thursday evenings. 

If you want to find out more about the case for Leave, I would recommend listening to Dan Hannan or Tony Benn, or perhaps even reading Michael Gove’s piece on why he is voting to leave. From the Remain side, David Cameron and Alan Johnson are the ones making the case most prominently. 

Ultimately, however, it will be your choice on June 23rd. The outcome will fundamentally alter the course of British politics. 

Whether we vote to leave or stay, there is uncertainty. Yet it is my strongly-held belief that leaving the EU is not a ‘leap into the dark’ but rather a ‘step into the light’, towards a more prosperous, more democratic United Kingdom.

What is your opinion on this issue? Should Britain stay in the EU or vote to leave? Put your opinions in the comments below!

The Cost of Chelsea's Failure

The past 10 months have been miserable for the blue part of South West London. From the very first day, Chelsea Football Club's season has been embroiled with controversy, instability and most importantly, failure. 



In any season of the Abramovich era, the scale of Chelsea failure would have been shocking- but coming after a season of winning the Premier League/Capital One Cup double with such comfort, no one saw this coming.

It's no difficult task to quantify Chelsea's overall lacklustre performance. Last season, with 30 games played, Chelsea were cruising in 1st place, with 70 points and a game in hand over second placed Arsenal, who were 7 points behind. The Capital One Cup was in the bag. This season, after 30 PL games, Chelsea are 10th in the league. On 41 points, and for the first time in a very long time, having drawn more matches than won. Elsewhere, the Blues were disposed of with relative ease from the Champions League and FA Cup by PSG and Everton respectively, and, well, it'd be better not to mention the Capital One Cup.

Now, much is made of the excesses of money in football- something that, no doubt, Chelsea have profited from massively over the past decade or so. But while this excess has rewarded success generously, it has equally put failure at a massive cost. Especially for a club like Chelsea, who have performed so consistently in recent years.

Premier League Prize Money 2014-15
[sportingintelligence.com]

Chelsea's Premier League struggles will cost them. Last season, the club won the largest ever Premier League prize bounty of £99m. Now, of course, any estimates of this year's prize money are totally dependent upon how we predict Chelsea will finish this year. If we assume merit payments (the portion of prize money dependent upon final position in the table) will stay the same as last year (in reality it will most likely increase, a little), Chelsea will lose out on £11m.

This won't be the greatest cost of failure this season, for Chelsea, however. Had Chelsea not lost to PSG and gone on to the final of the UEFA Champions League, they could have netted an extra £30m over the £18.7m they earned this year*. If they had won it, they could have earned up to £42m more.

But to be honest, while Chelsea were expected to go far in the UCL at the start of the year, few expected the Blues to win the competition- so perhaps these aren't the costs we should be thinking about. What we should be remembering is that, thanks to a terrible Premier League season, remaining in and winning the Champions League was Chelsea's last, thin hope of playing the Champions League next year. Knocked out of that by Paris Saint Germain, and now being very unfeasible that Hiddink's men will rise up the table to fourth from 11 points behind, Champions League football will not be visiting Stamford Bridge until at least August 2017. This has serious financial consequences.

It means that as substantial an amount of money won, even from such a disappointing campaign as this year's, will not reach the club accounts until at least the 2017/18 season. Even if they qualify for the Europa League next year, the prize money amounts for the two competitions are night and day. Tens of millions will be lost from Chelsea's failure to qualify for next year's Champions League, and this will most likely be the biggest financial consequence of the team's failures this season.

With chances of Champions League football next
season pretty much gone for Chelsea, we won't be
seeing similar celebrations any time soon.

To put these losses into perspective, remember that Chelsea Football Club, despite the footballing success and achieving its second highest ever turnover of £314m, lost £23.1m last season, with no particular massive expenditures to justify the loss. It's worrying to think that what the next two years have in store for Chelsea's finance when you consider such a loss, during one of the club's successful years.

UEFA'S Financial Fair Play Regulations are tightening for the next 3 years, allowing only a loss of €30m (£23m) to be incurred in each season. Now, I'm pretty sure the club would have some sort of way to avoid substantial consequences, even if they did break this rule. But if Chelsea were to fall foul of the FFP regulations next season and be punished, it would not just be a huge embarrassment for the club, but it could restrict their re-entrance into the Champions League, worsening the financial issues.

The Blues' finances will be made worse by the fact that this failure will necessitate the club to spend more, particularly on the acquisition of players. With a new manager coming in, the squad looking weak in a number of areas, and a number of key players set to leave in the search of UCL football next season, Chelsea will have to spend big this summer to rebuild the squad. It will be interesting to see how the club manages to balance finances- after all, investment is required to open up future successes, but in the short term will only worsen the financial situation.

Chelsea have some big investments to make in the near
future- not least the £500m renovation of Stamford Bridge.

Not only is Chelsea due to invest in players, but it is also working on a drastic renovation of its stadium, Stamford Bridge, a project expected to cost over £500m. Failure to get back on to track financially over the next few years will jeopardise this grand project.

This is, you could say, a pessimistic look at Chelsea's financial prospects for the next year or two. But, it is indeed a situation that the club must be aware of, and one that teaches us the perils of failure in football as well as the gifts of success. The bigger you are, the harder you fall- and while it is unlikely (hopefully!) that Chelsea will collapse as a result of this season's failures alone, the financial effect will no doubt be felt hard.

What's your opinion on this matter? Will failure this season leave Chelsea in the lurch for the future or do you think will they bounce back quickly? Leave a comment below! 

*Estimates made from statistics from Total Sportek.

'Brexit': Liberation or Suicide?

On Thursday the 23^rd of June, a referendum will be held on whether Britain should remain a part of the European Union. This referendum will not only be one of the most significant events in British history, but also in Europe - James Rosanwo examines the key knock on effects of a potential vote in favour of Britain's exit.

The result of this impending vote could shape the future of the United Kingdom, as Scotland and Northern Ireland are heavily invested in Britain’s membership of the EU and will no doubt bring their own membership of the UK into question. The departure of a heavyweight member would certainly have negative effects on it’s the European Union’s dwindling economic stability.

The referendum was called after Mr Cameron completed his supposed renegotiation of Britain’s stance in the EU at the European Summit in Brussels, where he claims he has won concessions on behalf of Great Britain. However, many doubt it may do little to sway the result of the referendum in his favour. Soon after the announcement, many government ministers stated their intention to either back Mr Cameron’s campaign to remain in the EU or do the opposite, with high profile MPs, the likes of justice secretary Michael Gove and London mayor Boris Johnson, boldly reinforcing their discontent with remaining an EU member, pledging their allegiance to the “out” campaign.

The question of Britain's membership of the EU has created
a rift between key figures in the Conservative Party.

At the start of the year, the chances of “Brexit” seemed unlikely. However, recent events such as the European migration crisis and the incessant euro decline, seems to have many Britons favouring an exit. Whether, however, this is a good enough reason to opt for total economic uncertainty instead is debatable.

Mr Cameron has confirmed that if the British people decide to leave the EU, the UK would apply for withdrawal under Article 50 of the Lisbon treaty. Article 50 states that the EU countries’ would negotiate a new agreement with the withdrawing nation over a period of 2 years. It also specifies that the withdrawing state cannot participate in these discussions, so in essence the terms of the deal are established only By the EU. Hence it will be a process that will most likely not be quick or pleasant; neither will it yield results that would be favourable to Britain. One thing guaranteed is that the EU will be desperate to show that a decision to leave will not have a painless outcome.

Many opposed to remaining in the EU still maintain that Britain is being hindered by Europe, believing that  as a country free from the EU it would have an open Economy that would continue to trade with Europe and the rest of the world. Many have offered the Swiss and Norwegian models as  potential solutions:

The Swiss Model: Britain would emulate Switzerland and would negotiate trade treaties sector by sector.

The Norwegian Model: Britain leaves the EU but joins the European Economic Area, giving it access to the single market, with the exception of financial services but exempting it from EU rules on agriculture, fisheries and home affairs.

In practice, however, these models would be very difficult to implement. At the bare minimum, the EU would only allow access to the single market in return for obedience to rules Eurosceptics are so eager to escape, meaning they would still most likely demand free movement of people and big payments to its budget before permitting access to the market. Nonetheless, to these “Brexit” campaigners these hardships would be worth it, if it meant regaining independence from Europe and British sovereignty. 

Yet again, this supposed liberation is not as advantageous as it seems. In essence, Britain would be trading a greater power for a lesser one; in exchange for their newfound independence it would be relinquishing its ability to have any real influence in global issues. What is even more alarming is the threat posed to the EU and the West as a whole. Both Britain and the European Union would be significantly weaker, and less of an ally as separate entities. The strength of the EU is crucial to the West’s duty of maintaining global stability, an ordeal which is becoming more and more challenging given the ever persistent issues involving Russia, Syria, and North Africa etc. There’s no surprise why Russia’s Prime Minister Vladimir Putin would have no objection to ‘Brexit’, whereas America’s president Barack Obama has already urged the British people to vote to remain in the European Union.  

Britain's exit from the EU could further empower the already
dominant Germany.

Germany’s dominance in the EU would also monumentally increase, making them even more of an influence not just in Europe but on a global scale. Britain, on the other hand, would be on the sidelines outside the EU, free from but still in fact constrained by many rules it would have no role in formulating. We would be an independent Britain, still dependent on Europe.

The immediate effect of a vote in favour of 'Brexit' could also be devastating in further ways. Prolonged uncertainty over the UK’s new relationship with the EU would discourage investment, particularly foreign direct investment given Britain’s status as the financial capital of the world and the effects of these fears are already being identified; for instance, the recent fall of the value of the pound.

Above all, one question remains: will Britons be enticed by the illusion of a sovereign and liberal Britain, or will they see reason in the idea that there will always be safety in numbers? One thing is certain however, If the UK separates from the European Union, the decline of the pound will be the least of their worries.

Pros & Cons #5: Britain's Patent Box

In recent decades, Britain has quite significantly lagged behind other developed nations in its level of innovation and, partly as a consequence, productivity. An active 'Patent Box' has been one of the British government's headline measures taken to try to stimulate the country's level of Research and Development. 

So, what is the Patent Box, and what are its pros and cons?

This graph (left) tells you a lot about Britain's need for more research and development activities. Showing the proportion of national income spent on Research and Development projects, it highlights Britain's lack of investment in innovation compared to the rest of the developed world. Not only is the British average expenditure less than the OECD average, but it has also remained worryingly stagnant compared to almost every other country- in fact, it has decreased in the past decade.

The aim of the Patent box is to address this: "to provide an additional incentive for companies to retain and commercialise existing patents and to develop new innovative patented products", according to the Government itself. 

The Patent box does this by granting a lower level of corporation tax (10%, as opposed to the usual 20%) to profits earned as a result of patented innovations. 

PRO: Incentivising Innovation

This is the headline pro, the main aim of the whole project. Data presented on the right highlights the fact that very few patent applications emerge from the UK, and a major reason for this is the high cost of patenting, something that only hits smaller innovators hard. A properly drafted patent application in the UK can cost up to £6,000, with no guarantee that it will be accepted- it's common that multiple applications must be made before the patent is accepted. And even this does not ensure the international security of the intellectual property- there are even greater costs that come as a result of trying to win a patent abroad. 

In Japan, on the other hand, the cost of a patent applications (including attorney and translation fees) comes to around 210,000 yen, just over £1300. So it's very likely that patent costs are a major reason for the gap in application numbers between the UK and countries like Japan.

While the government wants to do little about patent costs, the proponents of the Patent box argue such smaller businesses will be helped out by the fact that their returns to innovation could be significantly increased by the new tax incentive. This higher profit possibility could give more encouragement to innovators to take greater risks with their inventions and commercialise them.

CON: Favours Larger Businesses?

However, there is an argument on the opposition side that the Patent box system is too 'complex' to be of great benefit to these small, independent innovators, and instead favours the larger firms with access to greater resources. While some financial barriers to entry may be lowered by the tax breaks granted by the box, it arguably also raises some more. 

In order to benefit from the Patent box, there are a number of compliance measures that have to be taken by businesses- most notably, they have to track and allocate R&D expenditures and subsequent patents through to their resulting income. This means that a company has to determine, document and prove how much of their profit is directly as a result of each of their patents. This is something that is far easier for massive businesses that will often have a whole department just for tax, than for small up and coming companies. The Institute for Fiscal Studies is a believer in this argument, arguing that "this [the Patent box] will lead to a significant increase in complexity and compliance burden... administratively burdensome and difficult in practice".

The iPhone 4 featured over 200 patents- the recipe for
a Patent box pickle indeed.

CON: Complexity

There is a further argument that while larger businesses may be in a better position to cope with the additional compliance costs brought by the Patent box, they will not be in an ideal position either. 

Larger businesses are more often than not holders of multiple patents, and in many cases these are commercialised in clusters, put into a single product. Take the iPhone, for example- the iPhone 4 from 2011 was crammed with over 200 patents, ranging from patents on the touchscreen technology, to the battery, to the then-new retina display. Now, Apple aren't beneficiaries of the patent box because their R&D does not take place in the UK- but if they could, how would they apportion their massive profits from the iPhone to each patent to present to the taxman? It would be impossible to objectively say that, for example, 10% of sales were purely down to the new battery patent they won for the phone.

And this issue is not just with phones, but essentially any product that requires more than a single patent- whether it is a car, a factory machine, the issue of apportioning responsibility for profits objectively to individual patents is a massive issue that is generated by the Patent box.

PRO: Attracting R&D to Britain
The Patent box phenomenon started in 2000, when it was introduced in Ireland. France followed in introducing the scheme in the next year, and since then, Belgium, Hungary, Luxembourg, Netherlands and Spain all adopted this approach to stimulating innovation- making the UK a relative newcomer, with our patent box opening in 2013.

With so many European countries having such a tax incentive in place, it was very important that the UK compete effectively with its neighbours, so that it didn't lose out from R&D activities moving away or not coming to Britain at all because of preferential tax rates. Therefore the Patent box, even if it doesn't make Britain more competitive than the rest of Europe, prevents the UK from lagging behind.

However, it's important to note that this might not be such a strong pro as it seems, considering recent developments in the OECD, whose excitingly titled 'Base Erosion and Profit Sharing' (BEPS) scheme intends to tame the level of migration of businesses due to tax reasons. A consequence of BEPS has been that most European patent boxes have now introduced 'Nexus' clauses that require beneficiaries to have performed all of their R&D in the country whose box they are using. So, to benefit from Britain's patent box, a company will have to do all of its work developing a patent in Britain. This reduces the likelihood of companies moving in the middle of their research projects just to benefit from tax cuts, and ensures that the host country granting the tax cut benefits from all of the positive externalities (consequences) of the research.

Nevertheless, it is still important that the UK's Patent box remains competitive, especially when it is considered that some companies will take tax breaks into account when they are planning to set out on their research.

CON: Better alternatives?
The tax cuts granted by Britain's Patent box system loses the government an estimated £740 million in annual tax revenues, so it's incredibly important that this huge cost is allocated to the scheme that is most effective in increasing Britain's innovative competitiveness.

And many argue that there are far more efficient schemes, most notably the existing system of R&D credits. R&D credits reward businesses for research activity in general (as opposed to exclusively commercialised patents), by excluding as much as 150% of research costs from end of year profits. This may sound like a bad thing, but it just means that research expenditure (and a bit more) will be excluded from taxation- ultimately decreasing tax expenses and increasing profits of the company. According to the IFS, R&D credits are preferable to the Patent box as they are "given in proportion to the amount of investment activity undertaken", as opposed to the Patent box which rewards only the profits derived from the group of patented, commercialised research.

£740m is a massive amount of money to sacrifice every year, so there are further alternatives to the Patent box that could have real, long lasting and crucially sustainable effects on the UK's level of innovation. Investment in human capital is arguably the most important of these alternatives- investment in the people of Britain, through avenues such as education, healthcare and general infrastructure.

Investing in education would have massive effects on the level of innovation in Britain. A better educated population would increase the level of innovative activity going on, and the multiplying benefits of a well educated society would mean an initial short term investment could bring far reaching long term benefits. However, that is the issue for some politicians- human capital investment in general often incurs large short term costs, for mostly long term benefits.

Conclusion
One thing that is clear, in this debate over the UK's Patent box, is that this is not simply a case of weighing the number of pros against the number of cons. It's quite evident that the number of cons outweigh the number of pros- but what is most important to consider here is whether the positive impacts of the Patent box outweigh the negative ones.

From our perspective, the negatives outweigh the positives. The Patent box seems a good idea in principle, but in application its shortfalls are exposed. Notable is the burden its complexity places on both small and large businesses, and the scheme's targeting of commercialised patents rather than other forms of innovation (such as copyrights, trademarks, or non-commercial patents), but in our view its most significant downside is the opportunity cost. £740m is a massive sum of money, and it is highly likely that the British government could achieve its aims of increasing innovation in the country by distributing this cost between an improved R&D credits system and further focus on investing in human capital.