The UK Budget 2013 – ‘Lukewarm’?

Yesterday (20th March 2013), the Chancellor of the Exchequer (George Osborne) produced this years budget. Perhaps the most striking aspect is the fact that since his autumn statement, the predicted growth figure for this year has been halved, 1.2% down to 0.6%, with growth prospects in 2014 falling by 0.2% to 1.8%. This surely shows that little, if any progress is being made on getting our economy on the up and achieving sustainable growth.

I think it is important not to get caught up in the politics of the situation so I have asked myself a few questions on the budget; Who is going to most benefit from the budget? and is it actually going to help our economy or could it be described as ‘lukewarm’?

Firstly, the drop in corporation tax to 20% in 2015 will benefit large multinationals and medium sized businesses. This reduction of tax on the profits of businesses operating in the UK will install confidence into the economy and may attract companies to the UK. However, it is still not nearly the best rate in the world, say, compared to Ireland. The ‘rich’ are due to get a little bit richer due to a typical conservative policy; reducing income tax from 50% to 45% on employees earning over £150,000 which starts from next month. Moreover, small businesses will also benefit due to a national insurance contribution to holiday for business worth up to £2,000. So, it is clear that the main benefits of this budget are due to tax reductions. This may satisfy in the short term, but is it enough?

The entire purpose of the budget should be instilling confidence back into the UK economy. Although, this is tough due to the extremely volatile economic conditions occurring in the Eurozone, which has affected us as a country. George has understandably gone about it in a conservative way; the government will spend £3bn a year from 2015-2018 on infrastructure. The Government are also going to offer guarantees from the start of 2014 for three years on £130bn worth of mortgages, along with interest-free loans worth 20% of the value of new homes on properties worth up to £600,000. His intention of this was to increase confidence for first time buyers, but it could go the other way with people investing in a second property. Either way, it will be pumping money back into the economy, helping the circular flow of income, which is vital for the UK to successfully come out of this difficult time. Money drives the economy, and with people currently prone to save due to a lack of confidence, this spending on infrastructure and the housing market improvements may help, but I am sure they are not enough.

Perhaps the most pointless, and quite frankly absurd aspect of this years budget is the reduction of 1p off the price of a pint. Which has been (predictably)  criticized by the opposition. Furthermore, the opposition have again, predictably, stated that the Government must do a u-turn on their current policy. Their current policy is one of austerity (spending cuts). In this instance, I agree with Labour. Spending is the best way to kick start our economy, but not on the scale which caused the crisis in the first place. Cutting the deficit is essential, but the coalition has hardly made any progress since they began, which suggests they are either ‘on the wrong path’, or the ‘right path’ does not exist.

Increasing the confidence in businesses to invest and consumers to spend is the best way to kick-start the economy and although the budget has tried to do this, it is unlikely to be enough, in a sense, it is ‘lukewarm’

The next interesting date in terms of the UK economy will be to see if the UK will go into a ‘triple-dip’ recession, which could well be a possibility due to the negative growth figure of -0.3% seen in Q4 of 2012.


The UK Double-Dip recession is over; better times to come?

Yesterday (25 October 2012), the UK came out of recession after 3 quarters of negative growth. The economy grew by 1% in Q3, which is above the estimate by economists of 0.6%.  This is the largest rise in GDP for 5 years which shows the conservatives must be doing something right, with Mr Cameron stating that “We are on the right track”.

I expected the UK to come out of a recession due to the London 2012 Olympic and Paralympic games. However, this only accounted for 0.2% of the total 1% growth figure. What equated the other 0.8%? Well, the service sector grew by 1.3% and considering it declined by 0.1% in Q2, that is impressive. Too add, this is just a preliminary estimate made by the Office for National Statistics and the revised figure may be higher or lower.

This is obviously welcome news for us Britons, but the growth figure has to be put into some context. The negative growth in Q2 was enhanced by bad weather and an extra bank holiday for the Queen’s Diamond Jubilee celebrations. That, along with the Olympics, boosted the figure, and perhaps paints a better picture than what is actually happening with the UK economy. Furthermore, the output in Q3 of 2011 is almost exactly the same as it is Q3 of this year, clearly showing how the economy is stagnating.

It is good news that this most recent quarter has had a better than expected growth figure, but the economy still has a long way to go to reaching a ‘boom’.

I am still not convinced by the contractionary fiscal policy the Tories are adopting but I am a little more optimistic about the future of our economy.

How did the UK double-dip recession come about?

A recession is defined as two consecutive quarters of negative economic growth.

Today the UK went back into recession. The economy shrank by 0.3% in the last quarter of 2011 and 0.2% in the first quarter of 2012. Why has this happened?

A sharp fall in the Construction Sector over the last three months is perhaps a reason behind it. However, it ultimately shows that the Monetarist policy that the Conservative Party have adopted is not working. The fundamental aspect of the policy is to cut spending and increase taxes; a contractionary fiscal policy. The clue is in the name. Surely the economy wants to expand? not contract? So, perhaps a Keynesian policy should be adopted; spending our way out of recession. However, as shown by the Labour party under Gordon Brown, over spending and over borrowing is a recipe for disaster.

Ultimately, this shows the weakness of both political parties when it comes to running an economy.

For example, someone said to me today, one of the potential reasons behind David Cameron causing people to panic buy fuel, was because he was desperate to boost the economy knowing the figures for growth were likely to be negative.

A flawed way to try to increase economic growth.

It is unlikely that this recession is going to be as destructive and effective as the last one, as the growth figures are quite small in comparison to the height of negative growth in Q4 of 2008 at 2.3%.

It shows the powerful role of the media in making it out to be worse than it really is.