Brushing off VAT, and the hots for HANK

Afternoon all,

Despite writing this email for nearly three months, I’ve been struck by the proportion of editions which could fairly have opened with “what a week!” or (more realistically), a beleaguered sigh.

For me it’s been a week of three Ts – the Treasury Select Committee, the new Tax year, and then Tariffs, tariffs, tariffs.

So it was good to lighten the mood at Diane Coyle’s book launch last night. Check out her new book (and our conversation about it) for a thought-provoking examination of how unhelpful GDP is as a measure of progress (or living standards). It’s been an interesting week to reflect on the need for innovation in statistics, as well as fixing the plumbing.

Have a great weekend,

Ruth

Chief Executive
Resolution Foundation

Trade warriors. Merry liberation day to all who observed. We’re already pretty much in a variant of scenario two of the OBR’s trade scenarios (all of which leave the UK worse off than their central scenario). But the sun is shining so let’s consider a more optimistic take too – recent analysis concludes that, whatever happens, the UK will likely see income gains in all but the worst scenario (troubling caveat – we’ve drifted even closer to that worst-case over the course of writing this…). The worst scenario modelled sees a $1.4 trillion global loss (detailed analysis of each at the end of the paper for trade buffs). But the key takeaway for the UK is that we will experience “simultaneous trade disruptions and rerouting benefits”. So, all we need to do is balance our own bilateral gains against stabilising our relationship to the EU – easy! We talked about this last year at our (dare I say) prescient discussion with one of the report’s authors.

Conflict added tax. You might have heard Trump equating Value Added Taxes (VAT) to tariffs. Erm… why is he doing that? And is he right? In a word, no. But this helpful blog breaks down why it seems like he might have a point, but ultimately, doesn’t. VAT has been characterised as an “implicit subsidy” – since European exporters receive rebates on it, while American companies cough it up for goods sold to Europe. But VAT’s raison d’être is to tax *domestic consumption*, no matter where something was produced. It doesn’t tax consumption occurring abroad, even if goods were *produced* domestically. As an example, BMW and GM cars end up costing the same in Germany (more, because of VAT) and in the US (less, because no federal consumption tax). “VAT border adjustments (including export rebates) don’t create trade advantages”. Yet something tells me this explainer may fall on deaf ears.

Handsome HANK. This is techy, but interesting, so bear with. This week, our macro team informed me that “HANK is so hot right now”. For those not in the know, HANK (heterogeneous agent New-Keynesnian) macro models are more complex than classical economic models, incorporating more varied economic agents (aka people). Some have argued that HANK accounts for the fact that people who see the biggest income shocks in downturns (as in, the unemployed), are often the ones whose consumption is most vulnerable to those shocks (as in, they have limited savings). But this paper finds the *opposite* result in Norway. Due to the generous Nordic safety net, financially precarious households experience more stable incomes during a downturn than their better off citizens. But that’s just Scandinavia, right? Well, they also modelled a neutral impact for the US. This helps explain why simpler models have sufficed historically, since these dynamics averaged themselves out. Incidentally, this demonstrates (one reason) why redistribution is good – it creates a stabler economy by limiting the amplification of economic shocks, since the people losing their income don’t have such sensitive consumption. In sum, HANK is cool, but not always worth the extra effort.

Striking a bargain. Higher taxes boost worker rights. Yes, you read that right. This cunning paper from Canada suggests that since taxes make paying wages more expensive, higher taxes lead to people getting paid in employment rights instead. The authors analysed more than 30,000 Canadian Collective Bargaining Agreements (CBA) between 1986 and 2015, finding that higher regional taxes correlate with on the one hand lower employee salaries, but on the other an increase in rights-related clauses in CBAs. This could also work as a mechanism for assessing the value that workers ascribe to additional workplace rights – for this data set, a one-standard-deviation increase in rights is valued at six per cent of wages. So that’s one way to see higher Employer National Insurance Contributions and the Employment Rights Bill as complimentary after all.

Something for the weekend? | Where there’s a bill there’s a way

This Tuesday brought a new month and higher Council Tax (CT) bills for all (April Fools!). But the new tax year proper won’t kick in until Sunday – here are all the changes you should be aware of. We’ve broken down everything you need to know about not just tax, but also changes to utility bills and social security. The key thing to note is that while CT bills will rise an average of 5 per cent across England, the most painful bill increase will be water, with an average rise of 26 per cent, or around £120 a year (jumping as high as a 47 per cent increase for Southern Water customers).

But, April also brings a bumper 6.7 per cent rise in the National Living Wage, to the benefit of millions of workers. Although its concurrence with the changes to Employer National Insurance Contributions has led our friends at the IFS to theorise that this spells bad news for younger workers who are just starting out in the labour market. And when it comes to benefits, they’ll be rising this month but only by 1.7 per cent, despite a projected inflation figure of 3.2 per cent for 2025-26. I think you’ll agree that those numbers don’t quite add up for low-income households still struggling to recover from the cost of living crisis.

Chart of the week.

The news this week is all very international and depressing, so for COTW we thought retreat to the great British home comfort that is…the NHS! New data out this week shows satisfaction with the NHS falling to an all-time low, and here we show how that satisfaction compares to other NHS inputs and outputs. The pandemic was clearly a turning point, and while *correlation is not causation* you can see why the government is so focused on getting those waiting lists down. Money, on the other hand, looks like it won’t be enough on its own. The Department for Health has done relatively better than others out of recent settlements: 27 per cent real-per capita growth in RDEL since 2009 compared to the average 25 per cent cut across departments like Justice, Home Office and Work and Pensions. The challenges of an aging and an ailing population are enormous, but clearly the efficacy of health spending needs examining too, with the health sector becoming the biggest drag on national productivity since the pandemic. Decisions on health will be a huge driver of the shape of the overall Spending Review on 11 June – we’re digging into this more with new research on Wednesday. Come along!