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The cost of adjustment: emerging challenges for the UK economy – – ifs.org.uk

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All indications point to only a thin trade deal (if any) with the European Union after the Brexit transition period ends in December. Despite over four years passing since the referendum, many of the associated economic costs still likely lie ahead. The shock from Brexit will affect different sectors from the COVID shock, meaning that Brexit is likely to cause additional economic pain even as the economy recovers from the virus-driven downturn. In addition, we think COVID is likely to have hampered public and private preparations for the end of the Brexit transition period, compounding the near-term economic cost. We expect GDP growth in 2021 to be 2.1% lower than in the event the UK were to remain in the EU Single Market and Customs Union. In a normal year, this would be enough to push the economy into recession. Some of this growth is likely to be made up in 2022.

The UK has traditionally shown itself to be a relatively flexible economy. This reputation is likely to be tested to the extreme over the coming years. We expect substantial restructuring of the UK economy in the years ahead as it responds to the new shape of demand from UK consumers in the wake of COVID-19 and the new shape of trading relationships in the wake of Brexit. Such restructuring implies a more protracted economic recovery and a substantial loss of economic capacity as some of the expertise and capital specific to now shrinking sectors becomes surplus to requirements. Persistent policy support will be needed to help the economy through this transition. However, fiscal policy will also have to tread a fine line between supporting growth in the near term and charting a path to fiscal sustainability in the medium term. This is a significant challenge.

UK real quarterly GDP in various policy scenarios (2016 prices)

Source: Figure 3.1 in Chapter 3.

Key Findings

1. Brexit remains a substantial economic challenge for the UK. The options currently on the table appear to be restricted to only a thin trade deal or a no-deal exit. We anticipate that the former case would leave the UK economy 2.1% smaller in 2021 than in a counterfactual where the transition period continues indefinitely; a no-deal exit could see output depressed by an additional 0.5–1.0%.

2. The path that Brexit-related economic impacts take over the next 12–24 months will depend on when changes associated with the UK’s exit from the Single Market and Customs Union begin to materialise, and the extent to which firms have already acted to improve their resilience. We think the majority of Brexit-related adjustment lies ahead. Weak sterling since 2016 has provided an incentive for many firms to maintain UK operations where they can, even if now unviable in the longer term. Low investment to date may reflect some long-term adjustment, but also reduces overseas firms’ economic ties to the UK. Brexit-related adjustments could now therefore prove more front loaded.

3. Both COVID and Brexit are likely to result in medium-term economic reconfiguration, as well as near-term disruption. The UK labour market, in particular, has shown itself better able to adjust during previous downturns than other countries. Even so, the ‘double whammy’ of COVID and Brexit will make adjusting to the new normal a huge challenge.

4. Adjustment to a post-COVID, post-Brexit new normal will have economic costs that last into the long term. A rebalancing away from the consumer services sector (COVID) and some parts of manufacturing and financial/ business services (Brexit) would make much of the accumulated capital and skills in these sectors less valuable. For workers, the longer they remain unemployed, the worse their prospects in the labour market. This can have consequences that last for decades.

5. The economic response to COVID-19 has seen monetary and fiscal policy complement each other, as the Bank of England and the government both seek to support the economy. However, this complementarity is less assured in the medium term: upward pressure on inflation (and particularly inflation expectations) could lead to the Bank tightening monetary policy even if fiscal policy still needs to remain loose. The UK’s dependence on foreign credit remains a notable additional vulnerability. More fiscal support will likely be needed in the near term. But getting the public finances on a sustainable trajectory in the medium term is also now a key challenge.

 

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Hong Kong leader to visit Beijing to discuss plans to revive economy – The Globe and Mail

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Hong Kong leader Carrie Lam will travel to Beijing next week for a three-day visit to discuss plans to revive the global financial hub’s economy which has been battered by the COVID-19 pandemic and anti-government protests.

Lam, speaking at a weekly news briefing on Tuesday, said she would leave on Nov. 3 for the southern Chinese city of Shenzhen, where she will take a coronavirus test before travelling to Beijing.

“My trip to Beijing this time is solely on the economic side that is in light of the economic situation, which of course is very serious in Hong Kong,” Lam said on Tuesday.

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“We need more support measures from the mainland of China, especially in light of the overall direction that Hong Kong should move to better integrate with the mainland of China especially in the Greater Bay Area.”

The Beijing-backed leader postponed her annual policy address earlier this month in order to travel to the mainland for talks on how the central government can support the former British colony’s economic recovery.

She said she still plans to deliver her policy address by the end of November.

Lam has repeatedly touted the importance of the Greater Bay area – a region that includes Hong Kong, Macau and nine cities in China’s Guangdong province – as a key pillar to provide economic benefits to the Chinese-ruled city.

Hong Kong is reeling from the double blow of anti-government protests that plunged the city into its biggest crisis in decades last year and the impact of coronavirus.

Beijing imposed a national security law on Hong Kong in June that punishes what authorities broadly define as secession, sedition and collusion with foreign forces with up to life in jail, following a year of sometimes violent demonstrations.

Western governments and international human rights groups have expressed concern the law will crush freedoms in Hong Kong.

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Authorities in Beijing and Hong Kong have said the law is necessary to bring stability to the city.

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The Real Winner of the Work-From-Home Economy – BNN

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(Bloomberg Opinion) — South Korea is in something of a sweet spot for the Covid-19 era. Neighboring China, its biggest trading partner, is driving the global rebound and the world increasingly wants the technology that Korea sells. 

Gross domestic product figures are encouraging. The economy expanded 1.9% in the third quarter from the prior three months,  the government reported Tuesday, exceeding forecasts and the first positive reading this year. Growth retreated 1.3% on an annual basis, a milder decline than projected. The numbers are the second upbeat installment from North Asia in little more than a week. Recent figures indicate China is likely to be the only commercial power to show any growth this year. South Korea may come close, as could Taiwan.  

South Korea’s bounce is built on what leaves the country. Exports account for about 40% of the economy. Memory chips and electronics have benefited from a shift to work-and study-from-home during the pandemic. Other things shipped by Korea, like chemicals and metal products, haven’t done so well. While this mix means Korea is vulnerable to an eventual rebellion against the kitchen-table conference room, that prospect doesn’t appear imminent. Even hubs for global finance with strong executive government, such as Singapore, are slow-walking the return to downtown. WFH remains the default for much of the world.

Seoul’s willingness to cast off decades of budget prudence, too. No matter how many container ships or cargo planes dot the horizon, there’s little substitute for cranking up the printing press in fallow times. President Moon Jae-in has rolled out four stimulus packages as part of a fiscal onslaught equivalent to about 14% of GDP. While the government is anxious to repair the books once the recovery is assured, it would be premature to ease up now. Moon has space to do even more. South Korea’s debt levels, relative to the economy, are among the lowest in the Organization for Economic Cooperation and Development.

Muscular fiscal policy means more borrowing. Moon has been aided by a central bank that’s prepared to buy bonds on a fairly regular basis in the name of market stability. While the Bank of Korea shies from the term “quantitative easing,” it is keeping a lid on the price the government pays for money. 

Perhaps the real achievement is that the country kept coronavirus infections in check and returned to growth without a comprehensive lockdown or equally forced rapid reopening. China is aided by an authoritarian political system that can turn the key in either direction without dissent. South Korea is a democracy. Social distancing, contact tracing and dialing up (or down) other curbs on a localized basis worked pretty well.  

Lots could still go wrong. The global economy might take a turn for the worse, given the recent jump in U.S. and European infections. And at home in Korea, the natural boost an economy gets after exiting recession will eventually wear off. The country was posting fairly sluggish growth numbers before the pandemic. Unemployment is rising. And while it’s a relief to see growth return, the second-quarter contraction was the worst in decades.

For now, though, let’s acknowledge a job that’s been relatively well done.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

©2020 Bloomberg L.P.

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ADRIAN WHITE: Underground economy is thriving – The Guardian

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There is no doubt that COVID-19 has changed the way businesses function in Cape Breton. The pandemic has forced many entrepreneurs to reshape operating strategies for financial survival.  

Think of the new safety protocols for restaurants to protect staff and customers from virus transmission. Think sporting events playing out before near-empty stadiums and instead focused heavily on revenues generated from media broadcast of the event.  

There are just too many changes to business practices to list here in this column including the growth of digitization in our economy but I wanted to single out a few examples to illustrate some telling impacts. 

One major impact comes from folks not feeling safe to travel outside the province or eat out in restaurants due to the pandemic. Instead, they are using some of those cash savings to fund home improvement projects right here in the Cape Breton economy. That is a good thing for our community and our workers and it supports the “Shop Local-Buy Local” mantra being promoted by the local business community. 

Demand in the home improvement sector has soared and is so strong that it has led to a shortage of building materials, a rapid rise in material costs and a shortage of skilled labour to take on those home improvement projects.  

Many new contractors have entered the home improvement business in 2020 and many anxious homeowners are in hot pursuit of their services. Sometimes these contractors show up when expected to do a job and sometimes not. This has been a long-standing problem with small contractors in Cape Breton.  

Some contractors present an official written quote including HST for the project leaving a paper trail to follow while other contractors are quite prepared to take cash from the customer thereby avoiding HST. Cash leaves little trail for CRA to follow when it comes to reporting taxable income. 

This practice leads me to shed some light on the underground economy and its impact on our well-being as a province. Statistics Canada defines the underground economy as “consisting of market-based activities, whether legal or illegal, that escape measurement because of their hidden, illegal or informal nature.”  

I use the construction industry as an easy-to-understand example but you can imagine other opportunities for tax avoidance including buying illegal cigarettes, street sold cannabis, cash tips, paying cash for services, Airbnb cash rentals, or offshore bank accounts not being reported to CRA. 

In Nova Scotia, according to Statistics Canada, the underground economy was estimated to be $1.28 billion in 2018. That is near 3 per cent of provincial GDP. This is revenue that escapes government taxation. Nova Scotia’s underground economy as a share of GDP is higher than the national average which is troubling. Taxes on $1.28 billion would go a long way to offset the forecasted 2020 Nova Scotia budget deficit of $853 million due to the pandemic. 

Some of the underground economy is driven by the fact Nova Scotia has the second-highest personal income tax rates in the country. It remains one of three remaining provinces in the country that still practices “bracket creep” on your personal income tax deduction by not adjusting it to CPI on your annual income tax return.  

The higher the taxes the more incentive it provides for individuals and companies to embrace tax avoidance. Alberta has one of the lowest personal income tax rates in Canada and no provincial sales tax. It abandoned “bracket creep” on its residents decades ago. It also has one of the lowest underground economy as a share of GDP rates in the country running at 1.8 percent of provincial GDP.  

British Columbia has the highest ratio at 3.7 percent of GDP. In Canada, the underground economy was valued at a whopping $61 billion in 2018 amounting to 2.7 per cent of national GDP.  

I can only imagine with the increased demand for home improvement projects in Canada due to the pandemic that underground economic activity will likely increase 50 per cent rising close to $90 billion for 2020. 

In Nova Scotia, residential construction accounts for over 25 percent of the estimated underground economy GDP.  The next six largest contributors to the underground economy amount to about 50 per cent of Nova Scotia’s underground economy. They are retail trade, accommodation/food services, finance/insurance/real estate, manufacturing, professional/technical services and health care/social assistance.   

If we want to grow the Nova Scotia economy and thereby increase tax revenues to pay for the services we all expect, we are going to have to rethink the tax burden on individuals and businesses to bring balance and fairness to the tax environment. It is one of the reasons we struggle to recruit doctors to Cape Breton. Above-average taxes in Nova Scotia hinder economic expansion. High taxes will continue to drive the underground economy and tax avoidance until we address them. 

Adrian White is CEO of NNF Inc, Business Consultants. He resides Sydney & Baddeck and can be contacted at awhite889@gmail.com.

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