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Stephen Says...

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sharing occasional thoughts about things that interest me

A Basis for BREUNION?

the state of the country Posted on Fri, November 16, 2018 14:57:43

I couldn’t resist having a peek at the famous Withdrawal
Agreement about which there’s so much fuss. I was particularly interested in
finding out what it had to say about farming and fisheries.

The references to agricultural support (on pp 363-364)
restrict the UK to a maximum expenditure equivalent to
what we would have spent if we were still in the CAP, and to not reducing the share
of that spending which is on non-trade-distorting (so-called ‘Green Box’)

So we mustn’t increase state spending (as if the Treasury was
champing at the bit to do so) and we mustn’t link subsidies to production
levels. These are not difficult conditions to comply with. In fact they ought
to encourage a better bespoke British agricultural policy (less of the money
going to those large farms that need it less) which might become the envy of
remaining EU members (as their farm structures change to become more like ours,
and the political impact of existing CAP subsidies gets uncomfortable).

The provisions for fisheries are also thought-provoking.
Dealing with resource-problems that don’t respect national boundaries (free
movement of fish; free movement of pollutants) deserves fresh thinking. The
Brexit-related debate about fishing will promote a review of approaches to such issues that
ought to be welcome.

So the Withdrawal Agreement can be seen as giving
opportunities for Britain to improve existing EU policies by example or
leadership. And, if successful, maybe these developments will make continuing
membership more attractive. And as the transitional period can go on to the end
of the century…… ……….BREUNION

Thoughts Before The Budget

the state of the country Posted on Wed, November 15, 2017 10:30:49

The fundamental situation in global markets may be
summarised as follows: stocks of food (wheat, feedgrains and soya) and fuel
(oil) are high, and hence world food and fuel prices are low; interest rates
around the world are also low (probably as low as they can go); nevertheless
global effective demand is not growing so economic activity is not increasing.

In the UK, except for managers, directors and senior
officials, average gross weekly earnings of full-time employees are lower now
than they were at the end of the crisis in 2010; in real terms between 5% and
10% lower. So increases in real domestic consumption are not to be expected.

Meanwhile the British government has a persistent budget
deficit. A sustained period of economic growth would generate tax revenues that
might resolve this situation. Without such resolution, continuously increasing
public sector debt threatens the long-term financial sustainability of the
state. It is questionable whether the deficit can be addressed by substantial
reductions in current spending. The alternative of increasing taxation or
extending its scope is neglected.

As international interest rates increase then unless the
Bank of England raises UK rates competitively the sterling exchange rate will
devalue and prices of tradables will continue to increase in the UK, depressing
living standards and putting further pressure on the non-tradables sector (e.g.
health and social care).

Whether the recently improved conditions of the global
market for manufactures (2015 to date) will be sustained and whether the UK
domestic economy will be well enough adjusted to take advantage of the
situation are the questions that bear down on Budget Day decisions. The OBR is
widely expected to judge that productivity growth in the UK will continue to be
poor. How they judge the development of the global market is unpredictable.
Whether they judge that anything the Chancellor of the Exchequer does will have
significant impact in itself is beyond conjecture.

I can’t envisage external circumstances riding to the rescue
of the UK’s economic prospects. I think it’s up to the government to take some
steps. My own recommendations are:

Local authorities should be instructed to
commission house-building, to be retro-funded by the properties’ sales.

Implementation of road-improvement programmes
should be accelerated, and cancelled rail-electrification schemes should be
restored, and the Swansea tidal barrage project should be funded. This would be
paid for by introduction of a 5% Employment Transaction Tax and cancellation of

Trident renewal should be abandoned in favour of
expenditure on other defence measures (e.g. putting ‘planes on the new aircraft

Health service funding should be enhanced by 5%,
to be covered in the longer term by repatriated EU contributions.

and expanded schemes for lifewide learning should be introduced, with
associated redeployment of state educational resources (reduction in the
school-leaving age and redirection of university finance).

The economic crisis that is just around the corner will only
be a crisis for the British state because of persistent failures of the
government in terms of economic policy. In particular the failure to address
the budget deficit, which emerged at the turn of the century and was
accentuated by the GGFC (2007-2010). Regrettably the responsibility for this
failure in government policy will be deliberately obscured, presented as the
consequences of the Brexit decision and hence blamed on the result of the referendum
rather than, more appropriately, on the pathetic inadequacies of the political
and administrative establishment (aka ‘the unaccountable élite’). The
opportunity provided for this Establishment to enhance existing distractions,
of the ‘divide and rule’ variety, in order to sustain the social status quo is
unlikely to be missed. This prospect is exceedingly depressing, coming as it
does at the centenary of the Great War Armistice and the 50th
anniversary of the 1968 évènements;
both anniversaries associated with failures to reform ‘the world order’.

For a detailed analysis underlying these conclusions go to:

The Economic Consequences of Brexit

the state of the country Posted on Thu, August 31, 2017 15:39:49

Back in the day, before Britain joined the EEC, the world
economy meant an outside world into which only superfluous production
(production that by accident emerged without a predetermined destination) was
consigned for residual disposal. As a corollary to this, no country relied upon
ad hoc purchases from the outside
world as the basis for their own local supply.

Nowadays all that is changed. The global market place has
lost its residuary character. Prices are no longer the outcome of
unrepresentative disposal sales. Instead prices are determined by the
interaction of global effective demand and global availability of supply.
Mobile personal information technology makes buyers and sellers well aware of
market conditions, thus meaning that prices are struck across the world that
properly represent commercial reality.

In this situation, when a country imposes tariffs (putting
taxes on imports) it raises the price that its residents have to pay in order
to get foreign produce (by the amount of the tariff). And this also allows its
domestic producers to charge a higher price for their own output which is sold
to local residents. But of course these domestic producers will still only get
the world price for anything they sell abroad.

When a group of countries agree to operate a customs union they all agree to
charge the same tariffs on produce brought into the union from outside, whilst
allowing tariff-free movement of goods and services between the member
countries themselves. This means that the producers in all the member countries
share the benefit of the same higher prices they get than are being charged in
the world outside. Likewise the residents of all the member countries are taxed
equally for buying stuff from countries outside the customs union as well as
paying higher prices for local products.

When a group of countries agree to operate as a single market they agree to impose
the same rules and regulations regarding product quality standards and business
operating procedures. By doing this they facilitate trans-border commercial
activity and hope to capture benefits from economies of scale.

The European Union is both a customs union and a single market.
Brexit might mean the UK being automatically outside not only the political
organisation of the EU but also outside both these economic institutions (the
customs union and the single market). There has been a lot of discussion about
how much this might or might not matter.

The most important thing to bear in mind when considering
the consequences of Britain adopting an independent (post-EU) international
trading policy is that it will be based on the rules of the World Trade
Organisation and that these rules forbid discrimination. This means that the EU
cannot impose tariffs on British exports of goods and services that are more
onerous than those applied to trade from any other country outside the EU. So
there can be no ‘punishment’ for Britain in these terms.

WTO data indicate that the EU average tariff is 5%. And the
simplest trade policy for the UK to adopt, when it leaves, would be to apply
the same tariffs as it does already as a member of the EU. This would simply
result in Britain treating EU countries the same as it already treats all other
(non-EU) countries, and being treated in turn by the EU countries the same as
they treat other non-member states.

The result for UK producers would be to leave existing domestic
prices unchanged because they would still be defended by the same tariffs as at
present. But prices received for UK exports to the EU would now fall to the
same levels as apply across the ‘outside world’ (i.e. ‘world prices’, by
implication on average about 5% lower). Similarly, EU exporters would now only
be able to get the ‘outside world’ price for their sales to the UK (and of
course the UK government will now receive the proceeds of the UK’s own 5%
tariff on those imports).

A rough estimate of the implications for the British economy
can be arrived at using data from recent years. In 2014 the value of total
exports was £511,654m. At the same time
the value of total output was £3,889,971m, meaning that exports represented 13%
of the value of UK total economic output. According to the House of Commons
Library (Briefing Paper Number 7851, 4 July 2017) UK exports are currently
split 44% to the EU and 56% elsewhere. So the estimated value for UK exports to
the EU therefore comes to £225,128m (44% of total exports and about 6% of UK
total output). Now if, after Brexit, because the UK will be outside the customs
union, UK exporters receive 5% less for their goods and services (their sales
to EU countries no longer taking place inside the protection of the 5% EU
tariff) that will mean a reduction in revenue of £11,256m. The total profits of
UK producers in 2014 amounted to £700,923m. This means that if all the drop in
revenue was taken away from profits it would mean a fall in profits of 1.6%. In
fact, because only half the economic activity that takes place in the UK is
potentially exportable, this probably means that the reduced profits will apply
to only half of all the economic operators in the country and so amount to the equivalent
of a 3% reduction for those companies engaged in these activities. The
consequential fall in share values for such companies would also be 3%. Given
that the FTSE100 is at record levels at the moment this seems a very small
‘price to pay’ for what the chatterati
are calling ‘a hard Brexit’. Any preferential trade deal between Britain and
the EU would be expected to soften this impact.

Of course, lest there be any doubt, I’m well aware that
averages conceal degrees of variation: not all tariffs charged by the EU are 5%.
As the House of Commons Library says: “The trade-weighted average EU tariff for
non-agricultural products was 2.3% in 2014 and 8.5% for agricultural products”.
So because existing EU tariffs on agricultural products are often more than 5%,
farmland prices might fall by more than the 3% I’ve mentioned for exporters’
share prices. On the other hand anything currently EU-tariff-free might be
completely unaffected. But the main thrust of my point is still germane:
leaving the EU (single market and customs union) is not the economic big deal
that it’s been hyped as.

In fact I rather strongly suspect that Brexit and its much
exaggerated supposed economic consequences will be used to cloak a wide range
of measures introduced to benefit interest groups not excluding the organs of
government themselves (and including established political parties).

Post-Brexit Posturing

the state of the country Posted on Mon, March 06, 2017 15:16:57

There have been repeated suggestions that the results of the
referendum illustrate a polarised British social culture: divided according to personal preference either for or against UK
membership of the EU. Misrepresentation of the evidence has been rife. The
impression has been given, for example, that older people were overwhelmingly
for Brexit whilst the young were overwhelmingly the other way, and hence that
there is bitter division between young and old over this question. But actually
the evidence shows a 3 to 2 split (for Brexit) amongst the elders and a 2
to 3 split (against Brexit) amongst the youngsters. So both opinions, for and against, were well represented amongst old and young alike. The similarity in degree of
division within both groups (3 to 2 either way) makes them more alike in character than the opposite, despite
the divergence in their balance of opinion. And the same argument applies to
other allegedly opposed sub-groups of the franchise: Scotland was 3 to 2 for
staying, Wales was 3 to 2 for getting out; the Metropolis was 3 to 2 for
staying, the rest of England was 3 to 2 for getting out; the advantaged AB
social group was 3 to 2 for staying, the disadvantaged C1C2DE was 3 to 2 for
getting out; people with university degrees were 3 to 2 for staying, non-graduates were 3 to 2 for getting out. In all these cases the unifying similarity between the sub-groups
is the division of opinion within them; they are not sub-groups divided from
one another by uniformity of opinions within themselves. Promoting the notion of sectarian division between different social groups is delusional
posturing, actively poisoning British cultural solidarity.

Of course if some groups are 3 to 2 in favour but the rest are 3 to 2 against, the chances are that overall the result will be 5-all! It’s because we couldn’t be
sure which view was in the majority that we decided to conduct a head-count, using
the relatively recent British tradition of the secret ballot (legislated for in
1872). Abiding by the result of this particular ballot is a test of our political system. And in fact it seems to me far more dangerous for society that
there should be a significant preponderance (rather than a nearly
50-50 balance) because of the scope for a small minority to be subject to
discrimination: picked on, bullied or victimised.

Sterling and the ONS

the state of the country Posted on Tue, November 15, 2016 17:24:39

On October 28th 2016 the ONS published a piece
concerned with the implications of changes in the exchange rate for sterling (
In this article it says: “A fall in the pound means that UK exports will be
cheaper for customers in other countries to buy. This should help UK companies
increase the amount of goods and services they sell to the rest of the world
which would bring more money into the UK – potentially increasing employment,
growth and therefore living standards.” But this is utterly flawed.

Data extracted from past issues of the ONS “UK trade in
goods publication tables” unambiguously give the lie to the article’s assertion.

Here they are:

The figures indicate that devaluation of sterling in
conjunction with the Great Financial Crisis was substantial: from $2.00 in 2007
to $1.55 in 2010; a fall of 22%. In consequence, the traded goods price index for imports went from 76.2 in 2007 to 92.0 in
2010; a rise of 21%. Meanwhile the traded goods price index
for exports went from 75.6 in 2007 to 92.7 in 2010; also a rise of 23%. So neither in absolute nor in relative terms did
UK exports become cheaper as a result of this substantial devaluation.

In fact these data are precisely in line with what ought to
be expected. In reality, the prices of all tradable products are set in the
global market-place and denominated in $US. Then these global prices, which
apply both to UK imports and to UK exports, are translated into sterling via
the exchange rate. Hence both the prices of exports (when expressed in
sterling) and the prices of imports (when expressed in sterling) will rise as a
consequence of sterling’s depreciation.

Before posting this, I took a look at the most recent
version of the ONS balance of payments database and calculated the correlation
coefficient for the series giving prices of exports (BQAJ) and imports (ELAZ):
it was +0.99. And this ought to come as no surprise since, according to the 9th
November issue of the ONS “UK trade in goods publication tables”, you only need eight
types of product to account for more than half of UK exports and you only need the
same eight
to account for more than half of the UK’s imports as well.
The categories are: Mechanical machinery; Cars; Medicinal & pharmaceutical
products; Electrical machinery; Other miscellaneous manufactures; Scientific
& photographic equipment; Crude oil and Refined oil. So no wonder prices of
imports and exports move together: their prices are those of the same types of
products and come from the same world markets.

The price relativity which actually does change as a result
of devaluation is that between traded goods, for which prices are determined in
world markets, and non-traded goods (such as places in residential care homes),
for which prices are determined locally (i.e. directly in sterling). Hence the
major economic consequence of exchange rate change is a rebalancing of the
economy between the traded and the non-traded sectors (as their relative prices
are altered by alteration of the exchange rate). A fuller consideration of this
analysis, incorporating detailed estimates of the relevant relative magnitudes
(based on the ONS Supply & Use Tables), is available at:

European Union and the United Kingdom

the state of the country Posted on Fri, June 03, 2016 13:58:54

In many ways it is a shame that commitment to “ever closer
union” is not available to choose in the UK’s referendum on membership of the
European Union. Both options actually on offer exclude this idealistic
commitment which was at the heart of the project originally envisaged by the
founding parents of European amalgamation (whose idea began with economic
integration as a platform for associated political affiliation). In its
absence, the only options available are:

either half-hearted
consent to continued limited membership;

or attempted
abandonment of such commitments as remain after eschewing the euro and the
Schengen zone (these residual commitments being the common external tariff and
regulation associated with the Single Market, plus certain common policies,
such as the CAP, and financial contributions associated with funding them along
with a set of EU-wide institutions such as the European Parliament).

Given this context, concentration on the economic dimensions
of remaining or leaving is understandable. The free movement of resources
across the unified or single market is most visibly manifest in the case of
labour (i.e. workers’ economic migrancy): hence the consequences of immigration
in the UK are a subject for debate. Likewise, the feasibility and financial
consequences of alternative international trading arrangements are an issue
requiring discussion. Unsurprisingly therefore these two topics have dominated
the propaganda campaign being conducted on both ‘sides’ with a repellent lack
of regard for the intelligence of the public at large.

With regard to immigration: it seems to me that the
responsibility for dealing with any consequential congestion in relation to
public services or infrastructure lies with the national government; and since
immigrants are subject to taxation like the rest of the citizenry they can be
presumed to pay their way like the rest of us (not to mention that they may be
working in those public services anyway). Rejecting EU membership on the
grounds of its impact on immigration is effectively a vote of no confidence in
the UK national government rather than a judgement on the EU itself.

Regarding international trade arrangements: losing a protected
price advantage of 5% (typical for manufactures) will eat into margins or
value-added across the tradables sector of the economy whilst making such tradables
cheaper for consumers. Since most businesses buy inputs as well as selling
their output at such newly lower prices the impact on margins may be somewhat

It is by no means clear that the financial consequences of abandoning
the EU will be bad for the UK population in real terms. The Treasury’s analysis is completely bogus owing to the tragically flawed
view of the country’s economic situation according to which the Treasury
operates (see
for details).

If, as a consequence of abandoning membership of the EU,
sterling is devalued, then this will impact adversely upon the standard of
living enjoyed by workers in the UK in the short term by raising the prices of
tradable goods and services; but it will also increase margins or value-added
in those same tradables-producing sectors of the domestic economy (hence also offsetting
the impact of any reduced tariff protection).

The political choice that I might want is not available. Neither
‘side’ has made a case worth voting for. I would not make this choice on
economic grounds. Is it worth having a vote?

Labour’s Damaging Economic Doublethink

the state of the country Posted on Thu, January 14, 2016 10:48:53

On the on hand John McDonnell has called for “a New
Economics, laying the economic foundations of a prosperous, fairer and
sustainable society”. On the other hand he has promised to “demand that the
Office of Budget Responsibility and the Bank of England put their resources at
our disposal to test, test and test again to demonstrate our plans are workable
and affordable”. But John McDonnell misses the point: it’s the Old Economics of
the Treasury, the OBR and the Bank of England (what Gavyn Davies has usefully
termed ‘the standard apparatus’) that is at the root of the country’s economic
policy problems. Giving the OBR and the Bank responsibility for judging Labour
policy involves a prior commitment to seeing things their way. And their way is
completely wrong.

For as long as sterling remains a sovereign currency the
exchange rate will be a significant factor affecting the country’s economic
circumstances. But unfortunately both the Treasury (and hence the OBR) and the
Bank (and hence the MPC) hold to the heartfelt belief that “devaluation makes our
exports cheaper” (as Robert Chote puts it with technical precision, it causes “a
change in the relative prices of domestic and foreign goods”). This erroneous
preconception leads them to suppose that any depreciation of sterling will
expand sales volumes for British goods and services (because they’re cheaper)
thus boosting economic activity and employment. Such thinking is completely

Not only are the official expectations without justification
in terms of economic theory, they are also directly contradicted by the
evidence provided by the Office for National Statistics. The figures below
amply illustrate my point.

The ONS figures indicate that the standard expectations are
completely refuted. The devaluation of sterling in the aftermath of the Great
Financial Crisis has been substantial: from $1.87 in the years before the
crisis (2004-2007) to $1.57 in the years after it (2009-2012); from €1.47 in
the years before the crisis (2004-2007) to €1.17 in the years after it
(2009-2012). This devaluation raised the prices of goods imported and goods
exported alike: there has been no “change in the relative prices of domestic and
foreign goods”.

The traded goods price index for exports went from 74.7 in the
years before the crisis (2004-2007) to 94.9 in the years after it (2009-2012);
the traded goods price index for imports went from 74.4 in the years before the
crisis (2004-2007) to 94.9 in the years after it (2009-2012). In technical
terminology, the terms of trade remained unchanged. And this ought to come as
no surprise since you only need seven types of product to account for more than
half of UK exports and you only need the same seven to account
for more than half of the UK’s imports as well. The categories are: Mechanical
machinery; Electrical machinery; Cars; Medicinal & pharmaceutical products;
Refined oil; Crude oil; and Other miscellaneous manufactures. So no wonder prices
of imports and exports move together: their prices are those of the same types
of products and come from the same world markets.

In fact, the ONS data is entirely consistent with the proper
economic theory. In this, the crucial price-relativity affected by the exchange
rate is that between tradables and non-tradables. Tradables being those things
that are internationally portable (e.g. motor-vehicles; feed wheat; consultancy
services etc.,). Non-tradables being those things irrevocably confined to our
shores (e.g. residential property; domestic care services; the infrastructure
of the public realm etc.,). The impact of sterling’s devaluation has been to
raise the sterling prices of tradables across the board (i.e. both the things
we buy from overseas and the things we sell abroad) because their prices are
set in international markets (and not in sterling terms) and these are the
prices which apply equally to ‘imports’ and ‘exports’ (translated into sterling
terms by the same exchange rate), so there is no relative price change such as
the official experts expect. And consider the significant difference that this
makes: the flawed conventional wisdom believes devaluation is expansionary
(increasing domestic output) whilst the correct theory says it isn’t (rather
the opposite when you take’ income effects’ of price changes into account).

A more detailed consideration of the ONS data confirms that
import and export prices within the same (tradable) product categories
habitually move together (being basically the same international price of
course), showing that the UK is well integrated into global market
determination of producer prices for tradables. The pivotal role of the
exchange rate is to alter the balance of activity in the UK economy between the
tradables and the non-tradables sectors
: this comes about because whilst
prices in the latter (non-tradables) are inherently set in sterling, prices in
the former (tradables) are translated into sterling from abroad by the exchange
rate (thus changing when it changes: i.e. increasing when sterling is devalued).

Tradables and non-tradables each account for about half of
national income (GDP) so the scale of this problem posed by this price change is
significant. And because the government itself is responsible for a large part
of the national infrastructure (non-tradable) and for purchases of
(non-tradable) educational and healthcare services (on behalf of the population
at large) this is an issue bearing directly on the economic responsibilities of
government operation. So these observations are particularly pertinent for policy-makers
of a social democratic persuasion. They provide a platform for a party with a
purposive perspective on government: “a New Economics, laying the economic
foundations of a prosperous, fairer and sustainable society” (John McDonnell MP
speaking at UCL on 20th November 2015).

It cannot be in the best interests of the Labour Party or
the people that it aspires to represent that a false picture of the country’s
economic circumstances should be used as the platform for evaluation of the
policies that will affect so many important aspects of commercial performance
as well as standards of individual, household and community life. Sadly there
is no prospect that the reviews instituted by the Shadow Chancellor will challenge
the official standard apparatus: their terms of reference preclude it. The prospects for the country remain as bleak
as before: see (

Talk About Taxation

the state of the country Posted on Thu, August 13, 2015 15:26:51

I think it’s fair to say that most of us (who are not
self-employed) do not pay income tax or national insurance personally. That’s
because our employers transfer money to us through the PAYE system and
simultaneously they transfer money to the government, as ‘income tax’ and ‘national
insurance’, notionally on our behalf. But in effect what they’re doing is simply
paying a levy to the government and leaving us with the amount of money that
will persuade us to work for them.

I know it’s conventional to pretend that employers are
making these payments on our behalf (us, the workers they employ). But it’s not
the way we ourselves think about it really. In reality we all have what you
might call ‘rational expectations’: we all make judgements about wages and
salaries based on ‘take-home pay’; we all take decisions about offers of work
after making allowance for ‘stoppages’. And certainly everybody recognises (in
the light of numerous broadcast documentaries and News-items) that unemployed
people evaluate offers of work in relation to post-tax earnings vis-à-vis out-of-work benefits.

This system of taxation, in which levies are paid to
governments by employers notionally ‘on behalf of’ the workers they employ,
operates across the economically developed world. Reviewing the way in which
these levies are presented is quite interesting. The cost of making payments of
income tax and social security contributions (national insurance) is expressed
by the OECD as a ‘tax wedge’: the proportion of the total cost of employing
workers that is accounted for by making such payments (i.e. both those that are
being made notionally ‘on behalf of’ their workers – as ‘income tax’ or social
insurance ‘contributions’ – and those made as explicit payments by employers qua employers).

Figures in the table below illustrate the size of this tax
wedge in various comparable North-West European countries. You can see that it
varies quite widely: ranging from 26.6% in Ireland to 55.8% in Belgium. The UK
(31.48%) is towards the lower end of the range.

The last two columns in the table illustrate what happens if
the whole amount of employment cost (‘the tax wedge’) is expressed as a
transactions tax (like VAT) explicitly levied on purchases of labour. These
figures show that human resources are taxed more heavily than the general run
of purchased inputs (taxed by VAT) in most of the countries considered here
(though it’s fair to say that some specific inputs, such as energy, attract
special supplementary purchase/transaction taxes). This is appropriate because the
employment of workers is the best available indicator of the level of pressure
on the country’s infrastructure resulting from the operation of any particular
business (i.e. the tax levied on payments to employees is a proxy for costing
the use of the infrastructure as a business input; it stands in for an explicit rent, payable for the use of the infrastructure).

It should be apparent from these data that the implicit
transactions tax cost of employing workers in the UK is very competitive (i.e.
low) compared with that in other North-West European countries. This suggests
that there could be scope for an increase in this tax-rate without the prospect
of damaging the country’s competitive position internationally. In fact an
increase in the UK’s implicit employment transactions tax rate (and with the increase
explicitly imposed on employers rather than workers), so that overall it was
raised from 45.94% to nearer the Dutch level (58.58%), might be expected
largely to eliminate the budget deficit.

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