Budget 2013

Continuity rather than change as the UK economy continues to stroll along sluggishly

It has been a week since Chancellor of the Exchequer George Osborne announced his 2013 Budget and the reaction has been quite blunt in all honesty. The reaction probably reflects the state of the economy, flat and underwhelming. Osborne has decided to bring in more cuts, looser monetary policy and he is even trying to create another housing bubble.

Before I analyse some of the key facets of the Budget it should be noted that youth unemployment is close to 1m, underemployment (the number highly skilled workers in low paid work) currently stands at 3.05m and the Bank Of England is warning the country of a triple-dip recession. Things look bleak to say the least. With the economy performing so poorly I was hoping (not expecting) the Chancellor to announce at least one policy that could galvanise consumers; a cut in the rate of VAT would have been ideal. Retailers were complaining about a lack of spending on high streets at Christmas, making things cheaper would incentivise spending simply by making things cheaper. This could provide some remedy to the economy that clearly needs a boost.

But it was not to be and Osborne made it clear he was sticking to Plan A, deficit reduction. Unfortunately spending as a percentage of GDP has actually increased since the Coalition took power and this is due to the increase in unemployment and therefore welfare payments. This accounts for the nominal rise in welfare payments such as Job Seekers Allowance, but the decline in real terms. Home Secretary Iain Duncan Smith announcing a 1% increase.

Plan A is not working to the dismay of Osborne and the Office Of Budgetary Responsibility (OBR). The fiscal watchdog, a body founded by Osborne in 2010 had to revise its growth figures again, predicting growth in 2013 to just 0.6%, down from its previous figure of 1.2%. This is not the first time the OBR has had to revise its growth figures, leaving me to wonder how they can be repeatedly making either optimistic or unrealistic forecasts for growth. In their defence there are obviously only predictions and forecasts should never be taken as a given, still, it does not bode well. A figure of 1.2% is hardly triumphant; let alone slashing that figure by half.

As I mentioned the deficit is actually rising, so the austerity medicine is not actually working…yet. It was always a long-term goal, the goal to reduce the bloated public sector and have the private sector replace the jobs lost, but that clearly is not happening. The current deficit stands at £120billion, so the debt-to-GDP is at 88% (IMF). In other words, the public finances are going to have to reduce significantly until we say any major fiscal policies exerted by the government, as the debt-to-GDP is very high.

Clearly Osborne’s policies highlight his and the government’s stance on fiscal policies. But with the economy is such disarray there will be some avenue to try and stimulate the monetary side of the economy and this is the reason why Osborne has refreshed the Bank Of England’s mandate. In an attempt to provide more room to maneuver the Bank of England will now be a little more flexible in it approach. Perhaps the biggest change in the Bank Of England’s mandate is something known as “explicit forward guidance” whereby the MPC makes a pledge to keep rates very low over a designated period. This should give markets more confidence due to the stability announcements should provide. It should also grant consumers with sufficient information about interest rates on loans, if rates remain low it should encourage more spending. These outcomes remain hypothetical and over time, the Chancellor may refresh the remit. In my opinion, the policies may be ineffective. If you look at the current interest rate, it has been at a record low level of 0.5 % since March 2009 and that still has not added much to market confidence. This situation resembles Japan in the early 1990s. Not only can predictions be made about the interest rate, but the evidence given highlights that it does not always translate to increase in spending, despite the low level of interest attached. We could even be in a liquidity trap, a state in an economy where monetary policies have no effect on growth. The interest rate has been 0.5% since March 2009, since then the Bank Of England have tried to boost the economy by buying government debt, quantitative easing, which is monetary policy. Growth has remained very low and the policies do not appear to be working.

The Chancellor also announced a new policy known as the “Help to Buy” policy, which is designed to protect banks against losses on high value mortgages. Politically, it may look good, but economically there are questions. It sounds like a government funded credit bubble. Whilst I do not think it will resemble anything like what we saw during the Blair days of the economy being pumped full of toxic mortgages. As time elapses, the scheme will undoubtedly become clearer. It may even provide the boost this economy so desperately needs.

In all honesty this Budget has confirmed that the UK has a long road ahead in terms of a tangible growth. The economy continues to “grow” at a disappointing rate and there are more cuts to come. Despite the cut in beer relief, the cut in cooperation tax that benefits large multinationals more than small or medium sized ones, this Budget has reflected the mood of the economy. It has been flat.

How times have changed

Since the coalition came to power in 2009 the phrase “we inherited a mess” has being the prelude to almost every statement they have made with regards to the economy. It relates to Labour’s high levels of public expenditure. I try and think of when the Conservatives were in opposition and how much they said at the time to try and curb Labour’s spending. They did not. Moreover, they must accept some blame for allowing such heavy fiscal consumption and doing next to nothing to stop it. Chancellor of the Exchequer George Osborne is to deliver his budget tomorrow, I predict more of the same in terms of deficit reduction, with minor tweaks to try and boost the economy that has been sluggish for well over five years now.

http://news.bbc.co.uk/1/hi/uk_politics/6975536.stm

Good Read

This relates to my piece on footballer’s wages. Interesting piece.

http://www.bbc.co.uk/sport/0/football/21790728

Is Economic Growth the aim for the UK?

High Streets up and down the UK have not had the easiest times lately

Since 2007, the global financial crisis engulfed several leading economies and placed them in a precarious position. Output in many G20 nations declined and it was the worst downturn since the Great depression. When an economy is growing we notice that more people find work, credit is easier to obtain and living standards for the majority of society tends to rise in harmony with the economy. In a downturn and recession (defined to two consecutive quarters of negative output) the opposite tends to occur, less jobs created, rise in unemployment and usually a rise in income tax to compensate for the lost output.

Since the coalition in the UK came into power in May 2009, Chancellor of the Exchequer George Osborne has led the way with polices aimed at reducing the UK’s deficit. A deficit is the sum of government debt, deficits being a flow variable and debt being a stock variable. As we have all heard, this is his primary aim, so we have seen large reductions in government expenditure, in an attempt to curb government spending because the current government deem it too high. Fair enough, Labour may have binged a little on spending and some savings needed to be made. But, the best way to reduce government debt and therefore the deficit, is to stimulate economic growth. It is economic growth that will reduce the deficit, not only will growth translate into more jobs being created, more goods & services made available and more disposable income for households, but it will also help the government achieve their aim of deficit reduction.

It is this failure of George Osborne and Business Secretary Vince Cable to recognise this that has made me ask the question, is economic growth even their aim?

The OECD has backed Osborne’s economic policies, suggesting that fiscal consolidation is an urgent requirement. Whilst I can accept that, there are policies that the government could bring in in order to increase public spending. They have not. When the government came into power one of their first economic decisions was to increase VAT from 17.5% to 20%. This increase of 2.5% makes everyday goods that have VAT attached 2.5% more expensive. If you want people spending, make things cheaper, it’s that simple. Retailers had a rather subdued Christmas, had VAT being 15% or even 12.5% then I’m sure it would have had a significant difference.

The UK is also not a member of the Eurozone. This should provide a bit of protection from the farcical situation currently engulfing several imbalanced economies. Whilst the UK is very close to the other nations, the fact that it can manipulate its currency should provide some breathing room in which it could devalue the Pound and attract new business. With the Chancellor cutting cooperation tax, the UK should be seen as an ideal location for business. However, whatever effect the domestic currency is having alongside the competitive cooperation tax rates is clearly not penetrating the economy strong enough and the recovery is taking much longer than it should be. Moreover, incomes generated by large firms do not appear to be trickling down to the rest of society. Unemployment in the private sector confirms this, as it is increasing at a sluggish rate.

All of these factors combined makes me wonder if all this austerity is actually worth it, because the opportunity cost of allowing the economy to stroll along in this mundane manner represents time lost. It just appears that the government is holding back for future consumption. It is a dangerous move in my opinion because it could lead to large structural damages that could take several years to repair.

The Chancellor will be providing a new Budget soon and I’m sure it will contain more of what we have already heard.

I’ll conclude with the fact that David Cameron does not think you tackle a debt crisis by issuing more debt (governments increase debt when they spend). However, as so long as jobs are created, taxes are paid and the economy is growing the level of debt does not matter because the positive effects of economic growth cancel the negativity associated with the debt. It is when an economy is not growing that the level of debt and deficit becomes an issue. Furthermore, there is not a single large economy that has cut its way to growth, so if it does happen in the UK all of this austerity will be worth it. The benefits do appear to be a long way away right now.