A note from the editor
In our fourth and final edition of It’s the Economy, Stupid this term, the Global Affairs team takes a look at the biggest economics, business, and technology stories across the world. This week, we dive into the boardroom politics engulfing ChatGPT-creator OpenAI, crisis in Germany’s government budget, and the UK’s stealthy austerity.
The Global Affairs section is actively recruiting writers on science, technology, economics, and business for Hilary Term 2024. No experience necessary, we just want people with the interest to talk about these important developments across the world.
If you’d like to find out more or have suggestions for stories to cover, get in touch at either at firstname.lastname@example.org, or on Facebook! Until then, have a wonderful holiday from the Global Affairs team.
Jeremy Hunt Deploys Smoke and Mirrors for Autumn Statement
In general it’s a good idea in economics to raise things like NHS spending by the rate of inflation each year, because otherwise when prices rise, the NHS budget would buy less and less stuff each year. However Jeremy Hunt has decided to freeze spending across departments, despite the fact that inflation is at record highs. He has also decided not to increase the tax thresholds by inflation (the thresholds dictate how much of your income is taxed and how much of your income is taxed at the higher rate).
This little magic trick means that the government will earn more money in taxes and spend less on public services. Mr. Hunt has decided to spend the money made from this trick, on cutting other taxes. To his (tax) credit he has chosen the right taxes to cut. The Chancellor has cut National Insurance Tax and made full expensing for businesses permanent. National Insurance is a silly tax, which only taxes working people and leaves other forms of income untouched. The cut to businesses means that if firms spend their revenue by investing it back into their business, then they pay less tax; this is a sensible policy, which will incentivise firms to use their profits in a way that benefits the UK economy as a whole.
However, Jeremy Hunt’s little game will not work. By not raising spending by inflation he has created a hidden problem, which will cause headaches for any future government. What Hunt has announced is effectively a return to austerity and no future government will be able to stick to this commitment. Public services are already stretched after a decade of cuts and the disruption of a pandemic. School’s are literally crumbling and NHS waiting lists keep rising. This extra squeeze will not be sustainable without huge reforms and a big change to the size of the state.
Furthermore, his refusal to raise tax thresholds by inflation will mean that people pay more and more tax in the years to come. The overall tax burden on the economy (measured by total tax receipts as a percentage of GDP) will rise to its highest ever level and this will soon weigh on people’s finances.
So, while Jeremy Hunt can claim he has cut National Insurance, he has funded this by effectively cutting spending on public services and by using other stealthier methods for raising tax.
Chancellors should be honest about the state of government finances. The facts are:
- Interest rates are the highest they’ve been for decades, so borrowing money is expensive.
- Public services are unable to cope with the current levels of funding.
- The public are unwilling to pay higher taxes, because of the already high cost of living.
This puts the government in an impossible position and deploying accounting tricks to cover this up and pretend that there is money for tax cuts does not help anyone. The UK has two choices right now. Either wait out the storm and struggle through, by just about balancing the books until interest rates fall enough that borrowing money is cheap again, or deploy some bold ideas. Bold ideas include radically changing the form of the NHS (a recent report from the Institute of Fiscal Studies suggests that NHS productivity is falling behind dramatically), or big reforms to the tax system, such as raising capital gains tax, scrapping national insurance and fixing the problems with corporation tax.
Misleading the public and pretending there is spare cash does not count as sufficiently bold as to dramatically change the course of the UK economy. Sadly, the problems with UK government finances cannot be wished away and a future Chancellor will need to face up to these facts.
Ultimately it will be for voters to decide the future of the British economy whenever the next general election occurs. Mr. Hunt will be counting on the fact that nobody notices the issues he’s glossed over.
Germany’s budget thrown into crisis by court ruling
Germany’s government has been enveloped in a budget crisis, after the country’s top court ruled that the government’s plans to use unspent COVID-19 emergency credit for climate investment was unconstitutional. The ruling from the Federal Constitutional Court on November 15, brought forward by opposition lawmakers, found that the use of an off-budget borrowing fund violated the “debt brake” in the German constitution. Introduced in 2009 amid massive state spending after the 2008 financial crisis, Germany’s debt brake limits the government’s budget deficit to 0.35% of GDP. It was suspended for the first time in 2020 to address the COVID-19 pandemic, and has remained so amid Russia’s invasion of Ukraine and the energy crisis.
Chancellor Olaf Scholz’ €60 billion “Climate and Transition Fund” was originally intended to be funded by unused extra borrowing capacity created during the pandemic for climate investment. However, the court’s ruling will force the government to seek funding from other sources. Since then, Germany’s parliament has cancelled its vote on the 2024 budget, with the government bringing forward an emergency budget for the remainder of 2023.
As Chancellor Scholz remains committed to his government’s spending plans, the budget shortfall will either have to come from tax rises or spending cuts. The fiscally conservative Finance Minister Christian Lindner, from the governing coalition’s Free Democratic Party (FDP), has said that tax rises are out of the question. With Germany’s economy shrinking by 0.1% in the third quarter 2023, Lindner has argued that households and businesses cannot take any more financial strain. Instead, reforms to welfare and an end to a subsidised electricity and gas price cap will plug the gap, and the debt brake will continue to be suspended for its fourth consecutive year. Germany has also been forced to reject the EU’s request for billions of euros to top up the EU Common Budget and aid Ukraine.
The ruling poses a huge problem to Chancellor Scholz’ governing coalition with the Greens and FDP. It will limit the ambitious climate investment plans of Green Economy Minister Robert Habeck, while also forcing the government to break its promise to the fiscally conservative FDP that the debt brake would be reinstated in 2023. As the coalition’s polling drops to all time lows and the far-right Alternative für Deutschland (AfD) has become the second most popular party, a government crisis and likely spending cuts are the last thing needed.
OpenAI Crisis in Silicon Valley
It can sometimes feel in the UK as though we are very distant from the dramatic day-to-day of Silicon Valley. Nevertheless, it has been impossible to evade recent events at OpenAI.
It has been a turbulent last few days for OpenAI, the American artificial intelligence company famous for ChatGPT. On November 20th, OpenAI founders Sam Altman and Greg Brockman were ousted from the boardroom of the artificial intelligence start-up. In response, an estimated 747 out of 770 employees called for the resignation of the three responsible directors. Last week, Altman was reinstated, but not before Microsoft was quick to offer positions for both founders to lead their AI research division.
Altman is now back in the top seat as of November 23rd, but the question remains: why was he ousted in the first place? Though much of the scandal has been shrouded in secrecy, Helen Toner, now an ex-board member of OpenAI who was one of the three directors who considered Altman unfit for his role, shed light on the topic recently to the Financial Times’ Madhumita Murgia. Toner reported that she felt Altman could not be trusted, especially on geopolitical issues, and that with the growing power of generative AI and its capacity to influence millions of people, the prioritisation of ethics and safety must come first. If AI learns to code, for example, we could see a vast increase in cybercrime. This power, she feels, is in the hands of someone who is fundamentally irresponsible.
Another major concern, recently raised by Vinod Khosla, is what he terms as the ‘AI race with China’. There is a growing paranoia that China, using AI technology, will wield influence over the upcoming 2024 US elections. The importance of companies like OpenAI having a strong resistance to such election meddling is also a key factor in the mind of Helen Trones.
This comes at a backdrop of OpenAI being purported to be seeking an astonishing valuation of $86 billion. Many industry experts have warned against the AI technology ‘investor frenzy’ of Silicon Valley – as unthinkably vast sums of money have been poured into tech start-ups, with concerns as to whether they will be able to generate the expected returns. Pitchbook recently reported the rise in tech startups, now finding themselves unable to sustain enterprise costs, being the target of acquisitions especially towards the end of this year. In a similar vein, there has also been concern raised against OpenAI’s spending, which continues to spiral after they spent upwards of $500 million last year.
Nonetheless, it is evident that AI is pioneering the digital future and will grow as a lucrative business in the coming years.