New Economist

UK recession roundup: the magnificent seven

A lot of interesting newspaper articles and blog posts on the Q1 UK GDP results have been published since my post earlier today. Here are links to seven of the best, along with an excerpt from each:

1. NYT columnist and uber econoblogger Paul Krugman (@NYTimeskrugman) lambasts the UK Government's austerity plans: Cameron’s Remarkable Achievement

Now Britain is officially in double-dip recession, and has achieved the remarkable feat of doing worse this time around than it did in the 1930s. Britain is also unique in having chosen the Big Wrong freely, facing neither pressure from bond markets nor conditions imposed by Berlin and Frankfurt.

Now, the defense I hear from Cameron apologists is that the austerity mostly hasn’t even hit yet. But that’s really not much of a defense. Remember, the austerity was supposed to work by inspiring confidence; where’s the confidence? Basically, the expansionary aspect should already have kicked in; it’s all contraction from here.

Needless to say, Cameron and Osborne insist that they will not change course, which means that Britain will continue on a death spiral of self-defeating austerity.

2. NIESR director Jonathan Portes (@jdportes on Twitter) manages to quote both Keynes and Popper in his blog post, also critical of the government: On GDP figures today, credibility, and Popperian falsifiability..

Is there a credible alternative? Of course there is. You don't have to be Keynes to think so. And you don't have to take my word for it. Ask the IMF. Or Martin Wolf at the FT. Or Ian Mulheirn at the Social Market Foundation. Or John Van Reenen at the LSE. As I said over a year ago, the real hit to credibility comes from sticking to unsustainable policies in the face of the facts.

George Osborne says that we are all "at the outer fringes of the international debate." That's clearly false as far as serious economists go. But if he's right in terms of UK government policy, the main losers won't be us: it will be the unemployed, especially the young.

3. BBC economics editor Stephanie Flanders (@BBCStephanie) provides a good account of the numbers, including the impact of the Q1 construction decline, in her post: No recovery for UK: No let up for ONS

Are the official numbers wrong? An impressive number of independent experts, with access to a lot less information than the ONS, are today convinced that they are.  ...I don't know which is more striking, the doubts about the ONS numbers - or the supreme confidence of their critics.

4. Guardian economics editor Larry Elliott (@BusinessDesk) believes the double-dip recession affords George Osborne no escape from this reality

The coalition's fear is that the government would be punished by the markets if it went soft on austerity – and there is no obvious magic bullet for Osborne to fire. Since the recession began, the Treasury has borrowed £500bn, the pound has depreciated by 20%, interest rates have been pegged at 0.5% for more than three years, and the Bank of England has plonked £325bn of newly created money into the banking system. The result has been the weakest recovery of the past 100 years.

There are ideas knocking about. ...[but] Osborne has no Plan B and shows no sign of wanting one. He has made reduction of the budget deficit the judge and jury of Britain's performance, talking tough in the hope that the financial markets will spare Britain the harsh treatment they have meted out to the weaker members of the euro. Until now they have, but slow growth has meant progress in getting the deficit down has been much slower than the chancellor planned, and the credit rating agencies are getting jittery. Two of them have put the UK's prized AAA rating on negative watch.

A second recession hard on the heels of the first gives the (accurate) impression that the economy is a disaster area and makes a downgrade more likely.

5. Investment Chronicle writer and prolific econoblogger Chris Dillow (@CJFDillow) explains why there is such scepticism about the GDP estimate: What recession?

Today’s figures conflict with at least five other findings:

- Purchasing managers surveys found a “marked expansion” in construction activity, and the strongest growth in services activity since Q2 2010.

- Official figures show that retail sales volumes rose 0.8 per cent in the quarter. Would consumers really have gone on such a spending spree of the economy was shrinking?

-The ONS reported last week that in the three months ending February, total hours worked rose by 1.4 per cent. This can only be reconciled with falling GDP either if hours fell sharply in March or if productivity has slumped.

- The NIESR estimates that GDP grew by 0.1 per cent in Q1.

- The latest British Chambers of Commerce survey found a “welcome improvement” in the economy.

6. Telegraph assistant editor Jeremy Warner (@jeremywarnerUK) argues that the Chancellor must ignore this double-dip recession

Personally, I wouldn't try to deny that fiscal consolidation is damaging growth; the more important question is whether the Government has any choice in the matter. In my view it does not. We'll never know what would have happened to interest rates had Labour won the last election and pursued a different policy, but the evidence of sharply rising spreads around the political negotiations that led up to the formation of the Coalition is that like the eurozone periphery, they might well have run out of control.

For a highly indebted economy such as the UK's, with an overgrown banking sector, this was not a risk any sensible government could have afforded to run. The banking sector, not to mention many households and businesses, would have been tipped over the edge by any significant rise in short and long term interest rates.

Stagnation in the UK economy is not the result of government policy as such, but is part of the adjustment process to the financial crisis. The idea that you should counter a crisis caused by too much debt by taking on more of it runs counter to common sense.

7. Finally, housing writer/blogger Jules Birch (@jules_birch) argues that housebuilding "will deliver the quickest boost to the economy and generate the most jobs": If you’re in a hole, start digging

Judging from his speech at the Home Builders Federation (HBF) this week Grant Shapps seems to think that all he has to do is sit back and wait for all his initiatives, from FirstBuy to NewBuy, from cutting red tape to boosting self-build, from the New Homes Bonus to extending the right to buy, to pay off. ...Yet for all the rhetoric and all the new wheezes, housebuilding remains stuck at around half the level needed to meet demand and nowhere near his ‘gold standard’ of building more homes than Labour.

Relying on big housebuilders that care more about rebuilding their balance sheets than building homes will not work. A serious programme of investment in building new homes and refurbishing empty ones could be channeled through smaller firms, housing associations and local authorities and combined with reform of the housebuilding industry. That would start to generate the jobs and deliver the boost for the economy we need at the same time as tackling the housing shortage. Borrow to invest, change the borrowing rules or try something new like quantitative easing for housing. We are in a hole. It’s time to start digging.

UK’s double dip recession: your questions answered

This morning the Office for National Statistics published preliminary estimates of an -0.2% fall in March quarter 2012 GDP. This follows a -0.3% contraction in Q4, so pulling the UK into a ‘double dip’ recession (the first since the 1970s). Below are some frequently asked questions, and my response.

Was the fall a surprise?

Most forecasters were expecting very modest growth in Q1, with the median estimate (according to Bloomberg) for a +0.1% increase. These forecasts were in line with most leading indicators and partial indicators, which pointed to sub-trend growth last quarter.

Though disappointed, however, I doubt many commentators (including myself) were that surprised. Preliminary GDP numbers are notoriously volatile, and there are several variables which can unexpectedly throw the result (more about that later).

Why did growth fall in Q1?

The services sector, which accounts for more than three-quarters of output, is not in recession - it rose a modest 0.1% in Q1 (a lot lower than business surveys and retail sales suggested). Industrial production fell by -0.4%, but that alone would not have been enough to produce a negative number. What dragged it lower was a -3% fall in construction output, which detracted 0.2 percentage points from the headline number. Without that fall, GDP would have been flat last quarter.

Should we believe these estimates?

Not particularly. Preliminary GDP estimates in the UK are based on less than half the data that go into the final national account estimates. The rest are extrapolated or imputed. They are frequently subject to large downward (or more commonly, upward) revisions. In a year or two’s time we could well discover there was no ‘double dip’ recession after all.

Former MPC member Andrew Sentance gave a powerful example in a March 30 blog:

In the early 1990s, the recession appeared to continue through 1992 and into early 1993. At the time, it was believed to be the longest recession that the UK had experienced since the Second World War. The most recent data show the decline in GDP coming to an end in late 1991, exactly when Norman Lamont declared he could see the “green shoots of recovery”. He was right, though ridiculed at the time.

Most economic commentators are likely to react with a degree of scepticism to today’s numbers, for three reasons. First, past GDP estimates have experienced major revisions. Second, there are serious quality concerns about some of the inputs, especially construction. Third, and most important, because these estimates are at odds with most of the other main indicators of economic activity. The numbers simply don’t gel.

So we shouldn’t be too worried?

Yes we should. There is a real risk that the headline contraction, reinforced by ‘doom and gloom’ stories the media will pump out over coming days, will weaken already soft consumer confidence and spending, discourage British business from hiring or spending, and deter foreign investment. If Britons talk themselves into a funk we could see what (to me at least) looks like a temporary soft patch into a more serious and protracted downturn. It’s all about Keynes ‘animal spirits’, as Akerlof and Shiller and others have noted.

How will the Government respond?

Calls for the Chancellor, George Osborne, to abandon (or at least modify) his fiscal austerity plans will grow. However ministers are terrified at the prospect of losing their AAA rating, and there are few signs of a ‘Plan B’ in the works. Indeed on Monday the Treasury chief secretary said he had asked Government department’s to identify another £16bn of cuts.

With the Office for Budgetary Responsibility set to downgrade its growth forecasts, larger spending cuts will be required simply to maintain the Government’s debt-to-GDP targets. So should the government cut even more, maintain its existing spending plans, or rethink its approach?

We can expect a protracted debate in the UK about whether the pace of spending cuts is too high, and hence self-defeating. It is a view forcefully made by Jonathan Portes, and even the IMF in their January 2012 World Economic Outlook Update (PDF):

Overdoing fiscal adjustment in the short term to counter cyclical revenue losses will further undercut activity, diminish popular support for adjustment, and undermine market confidence.

The IFS Green Budget: time for some prudence

The Institute for Fiscal Studies launched its IFS Green Budget 2008 at a half-day conference yesterday. A preview of the official UK Budget due mid-March, it's comprehensive and thought provoking document for anyone with an interest in the state of the UK economy or public finances. Both the full 312 page (3.9Mb) report itself and the PowerPoint presentations from yesterday's seminar are available to download online. You can also download individual chapters. The nine presentations covered:

* The economic outlook, David Miles, Morgan Stanley
* Labour's record on the public finances, Robert Chote, Carl Emmerson and Gemma Tetlow, IFS
* The public finances going forward, Robert Chote, Carl Emmerson and Gemma Tetlow, IFS
* Funding issues and debt management, David Miles and Laurence Mutkin, Morgan Stanley
* Public sector pay and pensions, Antoine Bozio and Paul Johnson, IFS
* Capital gains tax, Stuart Adam, IFS
* Taxation of foreign profits, Malcolm Gammie, Rachel Griffith and Helen Miller, IFS
* Aviation taxes, Andrew Leicester and Cormac O'Dea, IFS
* Impact of tax and benefit changes taking effect in April 2008, David Philips, IFS

The reports' authors are gloomier than Treasury officials about the outlook for tax receipts and borrowing over the next two years, given the downside risks facing the UK economy. The IFS baseline forecast scenario is not for a recession, though. They expect sub-trend growth in both 2008-09 and 2009-10, resulting in a larger budget deficit, higher public sector debt, and slower path to surplus than official forecasts. The IFS press release (PDF) puts it like this:

..we fear that tax revenues will not grow as strongly as the Treasury hopes, as the impact of the credit crunch and a weak outlook for profit growth depress Corporation Tax receipts and as weaker share and property prices reduce Stamp Duty revenues.

Under existing policies, we expect the Government to have to borrow more than £40 billion this year, next year and in 2009-10. We expect public sector net debt to hit the Government’s ceiling of 40% of national income in 2009-10 and to rise to 41.2% by 2012-13. The Government would also break its “golden rule” (to borrow only to pay for investment) over the new economic cycle, unless that cycle lasts at least a decade.

IFS Director Robert Chote argued at the conference that the government faced a "difficult call", but some action now would be "prudent". The report also reminds us that the UK’s debt remains below the OECD average,and government debt and borrowing are still both lower than when the Conservatives left office in 1997. Press coverage was predictably more critical, with most reporters focussing on the need to raise taxes. Today's FT report by Chris Giles is typical: Increase taxation by £8bn, Darling told

So precarious are the public finances that Alistair Darling should raise taxation by £8bn in the Budget even though the economy faces the risk of a brutal slowdown, says the Institute for Fiscal Studies.

A brutal slowdown? Hardly. True, Morgan Stanley's economic projections include a more pessimistic scenario in which the UK economy suffers a ‘technical recession’. But they see only a one-in-three probability of this; I would rate the chances even lower.

UPDATE:
Martin Wolf is less downbeat in his 8 February FT piece, Why a crisis is also an opportunity. He argues that "it is not that the government’s overall fiscal performance has been lamentable. It has merely been mediocre." The government must rebalance, and could benefit from depreciation: "a weaker real exchange rate is a valuable part of the economic adjustment". He concludes:

The UK economy could not continue indefinitely on its course of rising internal debt and external deficits. Equally, the government could not continue indefinitely raising the share of public spending in GDP and missing fiscal targets. These trends are now at an end. How well the necessary corrections are managed will determine how well a rebalanced economy performs in the years ahead.

Hard to disagree with that.

Britain's super rich: racing away?

The latest Institute for Fiscal Studies briefing note, Racing away? Income inequality and the evolution of high incomes, focuses on the 'super-rich'. Authors Mike Brewer, Luke Sibieta and Liam Wren-Lewis define this group of 'high income individuals' as the richest 1 in every 1,000 taxpayers (i.e. the top 0.1%) The super-rich earn £350,000 or more in taxable income a year. Nine in every ten are men, and most are lawyers, City bankers and the like. The accompanying IFS press release states:

The outlook for inequality in Britain may depend more on the outlook for the stock market than on Government tax and benefit policies, a study by IFS researchers suggests today. Even though the current Government has increased taxes on people with high incomes, this has not prevented them from them racing further away from the average level of living standards across the country. In recent years, it is only in the wake of extended falls in the stock market that the incomes of the richest have fallen.

The FT's Chris Giles comments on the role played by market forces in his piece, Very rich get richer under Labour:

Highlighting a sea-change from the early post-war years when wealth often derived from land or other inherited assets, Mr Sibieta said the 21st century super-rich received 80 per cent of their incomes from an occupation - whether salaried or self-employment - rather than investments. "We are talking about the working rich rather than the idle rich," said Mr Sibieta.

But the past decade has seen rich people's income sputter as well as soar. With so many working in finance, there is a strong link between their fortunes and those of the stock market. Real incomes of top-earners grew 6.6 per cent a year on average between 1996-97 and 2001-02.

Yet in the following two years, when the stock market reached its low point, they fell on average by 2.7 per cent, before picking up again alongside equities in 2004-05. That tight correlation leads the IFS to predict that, with the rapid growth of financial markets since 2004-05, the incomes of the richest will have risen quickly in the past two years.

The data show the impact of Labour's generous funding of the public services this decade. The one group outside finance, the law or property to be well represented in the top 1 per cent of incomes works in the health sector. These were "presumably doctors and senior health service managers who have enjoyed relatively big pay increases under Labour", added Mr Sibieta.

The 'super-rich' earn 31 times average incomes: around £780,000 pre-tax income a year, of which they pay on average almost £275,000 in income tax: a tax rate of 35.3%. This is double the rate paid by the average UK taxpayer, who earns around £25,000 and pays £4,400 in tax: a rate of 17.6%.

Why Is Elvis on Burkina Faso postage stamps?

The University of Michigan's Joel Slemrod has a fascinating new paper examining how many small states commercialise their state sovereignty. This can ioccur in a variety of ways, from stamps to tax havens. His paper, Why Is Elvis on Burkina Faso Postage Stamps? Cross-National Evidence on the Commercialization of State Sovereignty (PDF), looks at four forms of commercialisation and the relationship between them. He concludes that countries that are poorer and smaller are, ceteris paribus, more likely to commercialise state sovereignty:

Commercialization is more attractive to poorer countries in three out of four cases, and in two cases to more agricultural countries at a given level of per capita income. This provides some support to the notion that when revenue is difficult to raise in other ways commercialization becomes more attractive. In three of four cases these activities are more attractive to small countries, a finding that is consistent with the Slemrod and Wilson (2007) hypothesis about tax havens that the benefits are unrelated to size but the costs are.

But there are downsides too, ranging from "costs related to integrity" to sanctions "for less benign activities".

The U.S. Earned Income Tax Credit: a primer

Bruce D. Meyer from Chicago University's Harris School of Public Policy Studies recently prepared a primer on the Earned Income Tax Credit for a conference organized by the Economic Council of Sweden. The paper, The U.S. Earned Income Tax Credit, its Effects, and Possible Reforms (PDF), is a useful primer on the subject. Here's what it covers:

In this paper, I first summarize how the U.S. Earned Income Tax Credit (EITC) operates and describe the characteristics of recipients. I then discuss empirical work on the effects of the EITC on poverty and income distribution, and its effects on labor supply. Next, I discuss a few policy concerns about the EITC: possible negative effects on hours of work and marriage, and problems of compliance with the tax system. I then briefly discuss some possible reforms to the structure of the current EITC.

And this is how Professor Meyer concludes:

In summary, the evidence indicates that the income distribution features of the EITC are quite good. It targets resources at those below the poverty line, particularly families with children. The empirical evidence on labor supply and marriage indicates that the incentives of the EITC are remarkably favorable given the resources transferred. However, there are still substantial opportunities for reform along several dimensions.

The reforms mooted include modifications to the tax schedule to reduce marriage penalties, simplifying eligibility criteria for the credit, and providing a more generous credit for single childless individuals or non-custodial fathers.

Learning the lessons from Sweden's budget crisis

In the early 1990s Sweden's long-lived economic recession posed a crisis on three fronts: an exploding budget deficit, high interest rates and record-high levels of unemployment. While other countries may have balked, Sweden implemented the painful foscal measures required - and they paid off.

In a new Breugel essay Jens Henriksson, a senior official in the Swedish Finance Ministry at the time, draws on his experience of one of the most dramatic consolidation episodes of the post-WWII period. In 10 Lessons about Budget Consolidation, Henriksson gives a truly fascinating and informed first-hand account. Here are the first two paragraphs:

In its Economic Outlook of December 1994 the OECD projected that the Swedish public debt would explode. By the year 2000 the public debt was expected to hit a record 128 percent of GDP2. Today we know that the gross debt for 2000 turned out to be less than half that figure at 53 percent. And within a few years the budget deficit, from a high of over 11 percent of GDP, turned into a large surplus.

But getting there was not an easy task. During the consolidation of public finances, I had the opportunity to work in close contact with different ministers of finance in Sweden. This paper relates what this experience taught me about the political economics of budget consolidation.

There are lessons here for all countries facing budget problems - not just those intent on he cutting back the sizxe of the state. As he notes:

It is not a paper about how to get rid of the welfare state. On the contrary, it is about how to strengthen the economic foundations for whatever kind of social model that is preferred. The budget consolidation in Sweden was dramatic but it preserved,preserved, and in many ways modernised and improved, the
welfare system.

Previous post
* The joys of fiscal consolidation, 25 May 2007

UPDATE: See also a new Cleveland Fed discussion paper by O. Emre Ergungor, On the Resolution of Financial Crises: The Swedish Experience (PDF)

Sweden was one of the Scandinavian countries experiencing a severe financial crisis In the late 1980s and early 1990s. I review the policy choices and external factors that pushed the country’s financial system over the edge and then examine the steps the government took to make its resolution of the crisis one of the most successful in the past 30 years.

India rising

If the Indian economy has been growig at such a robust pace, why has government debt risen so much? World Bank economists Marina Wes, Brian Pinto and Gaobo Pang answer the question in WB Policy Research Paper 4241: India rising - faster growth, lower indebtedness

Over the past 25 years, India's economy grew at an average real rate of close to 6 percent, with growth rates in recent years accelerating to 9 percent. Yet by 2005-06, the general government debt-to-GDP ratio was 34 percentage points higher than in the 1980s. The authors examine the links between public finances and growth in the post-1991 period. They argue that the main factor in the deterioration of government debt dynamics after the mid-1990s was a reform-induced loss in trade, customs, and financial repression taxes.

Over time, these very factors plus lower entry barriers have contributed to stronger microfoundations for growth by increasing competition and hardening budget constraints for firms and financial sector institutions. The authors suggest that the impressive growth acceleration of the past few years, which is now lowering government indebtedness, can be attributed to the lagged effects of these factors, which have taken time to attain a critical mass in view of India's gradual reforms.

Similarly, the worsening of public finances during the late 1990s can be attributed to the cumulative effects of tax losses, the negative growth effects of cuts in capital expenditure that were made to offset the tax losses, and a pullback in private investment (hence, growth and taxes), a situation which is now turning around. Insufficient capital expenditures have contributed to the infrastructure gap, which is seen as a constraint especially for rapid growth in manufacturing. The authors discuss ongoing reforms in revenue mobilization and fiscal adjustment at the state level, which if successfully implemented, will result in a better alignment of public finances with growth by generating further fiscal space for infrastructure and other development spending.

The joys of fiscal consolidation

'Fiscal consolidation'. Who but an economist could love such a clunky, unsexy phrase? But then, I am an economist; and so is the OECD. Their latest Economic Outlook includes a special chapter on: Fiscal consolidation: lessons from past experiences (PDF). The authors argue that alhough "fiscal consolidation is required in most OECD countries", it "remains a challenge' for many of them. Translation: they're spending too much and/or not taxing enough. The chapter looks for some lessons from on a dataset covering a large number of OECD fiscal consolidation episodes starting in the late 1970s. Here are their main findings, along with my own summary titles:

1. Facing a crisis helps

Consolidations were larger when the initial situation was difficult: Large initial deficits and high interest rates have been important in prompting fiscal adjustment and boosting the overall size of consolidation. These results may reflect that public awareness of fiscal problems and needs can help in overcoming resistance to consolidation, a hypothesis which is also supported by the observation that qualification for euro area membership significantly increased the probability of starting consolidation. The policy implication would be that consolidation may be helped by the provision of transparent information and analysis of the fiscal situation.

2. Spending cuts work better than tax hikes

Expenditure based consolidations tended to be larger and last longer: An emphasis on cutting current expenditures has been associated with overall larger consolidation and a large weight on social spending cuts increased the chances of stabilising the debt-to-GDP ratio. This could be because expenditure cuts, as opposed to revenue increases, are more likely to trigger lower interest rates and a sympathetic response of private saving, helping to bolster activity. But it could also reflect that governments more determined to consolidate are more willing to cut current expenditures, including social spending, possibly thereby also demonstrating a commitment that makes substantial consolidation more feasible.

3. Fiscal rules can help...

Countries with fiscal rules achieved better results: Fiscal rules with embedded expenditure targets tended to be associated with larger and longer adjustments, and higher success rates. This could in principle reflect that well designed fiscal rules are effective or, alternatively, that governments committed to prudent fiscal management are more likely to institute a rule.

4. ...but need careful design

Designing effective rules raises several issues: Fiscal rules need to be adapted to country specific institutions and political systems, but, based on experience across countries, certain common design features seem important for their effectiveness. These include the need to combine transparency with sufficient flexibility to face cyclical (and other) shocks, a wide coverage across various budget items and effective enforcement mechanisms.

The Economist also discusses this chapter, in its post Words of warning:

With a Kantian flourish, Jean-Philippe Cotis, the OECD's chief economist, argues that sticking to tight spending plans should be governments' “categorical imperative”. In fact, the organisation expects no further reduction in cyclically adjusted deficits in the next two years. It thinks America's will rise. And the historical record, presented in a special chapter of the Outlook, is not encouraging.

The chapter looks at 85 budget-tightening efforts undertaken since 1978 and tries to identify the conditions associated with success. Deficit cuts based on reduced spending have tended to be deeper and longer-lasting than those founded—as in the past couple of years—on increased revenues. That may be because lower spending leads to lower interest rates and hence stimulates economic activity. But it may be because it demonstrates a determination to limit the budget. When tax revenues go up, demands for new spending can be hard to resist—so that when revenues go down again, a new hole in the budget opens up.

Several countries have adopted rules designed to keep themselves on the fiscal straight and narrow. These usually place bounds on budget balances. However, the OECD finds they have more effect if combined with rules to limit expenditure—so that extra revenues are not automatically spent, as they might be if the fiscal balance were all that mattered. Balanced-budget rules not linked to expenditure limits, such as America's Gramm-Rudman-Hollings act of 1985 and the European Union's Stability and Growth Pact, have been less successful. Of course, it is hard to know whether fiscal rules stiffen finance ministers' spines or whether they are adopted by governments that already have the necessary political will.

Either way, the OECD's warning is a timely one. Though state counting-houses may be full now, it is not hard to imagine how they might be drained. The demands of an ageing population look staggering, unless today's systems are reformed. In Greece the combined toll of health care, long-term care and pensions is expected to amount to 7.5% of GDP by 2025 and 16.8% by 2050. In Portugal the expected burden is 6.1% by 2025, rising to 15.5% by 2050.

The Outlook has one more gloomy finding for budget hawks. Not surprisingly, governments are more likely to tighten their belts when budget deficits and interest rates are high—at times, in other words, precisely unlike these.

UK tax reform?

One of the issues the incoming Brown government may face soon is tax reform. According to Reuters:

The Confederation of British Industry has pulled together a "Tax Task Force" of leaders from major firms such as ICI, Pfizer, Cadbury Schweppes and Barclays and tax experts to come up with new ideas to reform the current system.

Chancellor Gordon Brown announced a cut in the corporation tax rate to 28 percent from 30 percent from next year in his March Budget, taking it below that of other big economies such as the U.S., Germany, France and Japan.

That, says CBI Director General Richard Lambert, was a step in the right direction, but deeper reform is needed to make the tax system competitive in the long term, especially as firms now have more choice over where they are based and pay tax. A survey by the business group last year showed that one in five UK firms had relocated some of its activities overseas because of gripes over tax.

Before that report, though, we will see the Mirrlees Review report published in January 2008: Reforming the Tax System for the 21st Century. Timed to coincide with the 30th anniversary of the Meade report on taxation, it will cover not only business but almost all forms of taxation. It promises to be a substantial work, with some fo the world's leading public finance experts involved. For those who can't wait until next year, a sneak preview of much of the draft report can be found here.