Monthly Archives: June 2010

UK coalition emergency budget – All Pain and No Gain?

The much awaited “austerity budget” is due on 22nd June and both individuals and business communities await the various instruments of torture to be applied to direct and indirect taxation, benefits and spending cuts. There will be a lot of pain but how much can the electorate stand, noting that even if the election had provided another result the same impact would have resulted in the attempts to repair the damaged economy.

Key issues – repayment of UK debt whilst keeping inflation down, (currently around 3.5%), and interest rates as low as possible, (base rate at 0.5% for 15 months), and growing the economy. 

The backdrop to achieving target reductions are;-

Public Sector Pensions – in the past these have been self balancing within a few million £ but the current deficit is about £4 billion per annum with this rising to £10bn by 2015. The questions are; – why the situation has been allowed to get “out of control”, why should the private sector subsidise this and the whole population suffer cuts in public spending and tax increases. It is understood that private sector pensions have been dealing with deficits and surpluses for many years, but Government has never addressed the issue or even appeared concerned.

Unemployment – officially 2.5 million but with another 8.2 million, (over 20% of the working age population) unable to or not wanting to work – with the former being a significantly higher proportion!! Tax increases mooted in VAT, CGT and benefit reductions may provide a temporary boost in spending prior to their introduction, but then there is the re-stagnation of the economy with unemployment likely to rise even more. 

Interest Rates – at 0.5% for over a year and in theory great for those able to borrow, (albeit that rates are well over the base rate), and remaining at this level possibly into 2011, but a pittance for savers.

Inflation – even if it falls to the 2% target, (currently 3.5%), this is well over the ability of many people to maintain real income, with pitiful savings rates and many in employment already suffering wage cuts or freezes.

The above shows some of the pain but with so much uncertainty for the consumer, business, the economy in general and the ongoing Eurozone debt crisis posing threats to UK growth prospects, there is no real sign of when the gains will be seen by the private individual or business community.

Déjà vu – UK economic statistics plus world events and credit ratings

There has been a raft of statistics in the last couple of weeks which seem to tell the same story as a few months ago – base interest rates on hold at 0.5%, GDP growth negligible, inflation slightly decreasing but still around 3.5%, UK debt borrowing figures revised downwards but on such high figures the repayment issues remain critical, sterling falling against the US Dollar and marking time with the Euro.

Global stock markets however have been falling from their highs early in the year, then rallying and retreating week to week, reacting to the various pronouncements on Greek debt repayments, the situation in Spain, Portugal, Ireland and Italy and other significant events such as the BP oil spillage in the Gulf of Mexico.

What is of more concern to the UK Treasury is the Fitch credit rating agency report which makes the case “for an acceleration of deficit reduction, particularly in light of events in the euro-area sovereign debt market in recent months.” Fitch also noted that the new coalition government had acted “very quickly”, making deficit reduction a top priority, but sounded a note of caution. It pointed out that most other countries had pledged to cut their fiscal deficits by more than the UK “with other European sovereigns strengthening their fiscal consolidation plans and market concerns about sovereign risk in advanced countries increasing, both the size of the UK deficit currently projected for 2011 and the failure to reduce it to 3% of GDP within five years are striking.” The UK currently has an AAA rating however this is being tested as each month passes as credit ratings are important as they influence how much it costs governments to borrow on open markets. If the UK does not meet or exceed its debt reduction targets, the rating will be cut and a deeper second dip recession may result……………..