Archive for December, 2009
Friday, December 18th, 2009
The UK’s public sector net borrowing reached £20.3bn in November which is the highest monthly figure since these figures were first started in 1993. This figure compares with the £15.5bn which was recorded in November 2008. This is according to figures published by the ONS this morning.
According to the Pre Budget Report the chancellor is expecting total public sector net borrowing to reach £178bn during 2009/10.
Public sector net debt when expressed as a percentage of gross domestic product was 60.2% at the end of November 2009 compared with 49.6% at the end of the same month last year. Net debt reached £844.5bn last month compared with £706.2bn a year earlier.
A large chunk of debt arose from the bank bailouts and when these interventions are excluded, public sector net debt at the end of September 2009 stood at £686.3bn which is equivalent to 49.3% of GDP. However, this figure stood at 39.4% a year earlier.
The good news was that November’s borrowing figure was lower than most analysts expected, which is good news on top of the promising unemployment figures which came out earlier in the week. Stabilising or falling unemployment will take some of the pressure off welfare benefits and more people in work will contribute towards the overall tax take. On top of this, the VAT rate will return to 17.5% in January, which will again help the flow into the government coffers.
Tags: government spending, public sector net borrowing, taxation
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Wednesday, December 16th, 2009
There was a fall in the number of people claiming Jobseeker’s Allowance, otherwise known as the claimant count, in November according to the ONS today. In fact the number fell by 6,300 over the previous month to give a total of 1.63 million out of work. This is the first monthly fall in this measure since February 2008.
The other measure of unemployment, which is the more generally accepted on an international basis, is the latest three month figure for August to October 2009, which shows an unemployment rate of 7.9%, which was unchanged on the previous quarter. The number of people unemployed according to this measure increased by 21,000 over the quarter to reach 2.49 million. This is the smallest increase in unemployment since the March to May 2008 quarter.
 We may be seeing more jobs at the end of the unemployment rainbow, but many of them are part-time.
There was also an increase in the number unemployed for more than 12 months of 49,000 over the quarter to reach 620,000. There was also an increase amongst 18-24 year olds as the unemployment rate in this category rose by 0.9 percentage points to reach 18.4%, which was the highest recorded figure since these records began in 1992.
The number of people in employment increased by 53,000 in the August to October quarter, to give a rate of 72.5%, which was unchanged compared to the previous quarter. However, whilst this looks like good news on the surface, it is important to look at the breakdown of employment. In fact, there were falls in both the number of men and women in full-time employment, but a rise of 120,000 in the number of women in part-time employment. And, according to the ONS, there are now just over one million people who are either employed or self-employed, who are working part-time solely because they cannot find a full-time job.
As far as average earnings are concerned, the public sector continues to grow at a faster rate than the private sector. Average earnings excluding bonuses for August to October rose by 2.7% in the public sector but only 1.4% in the private sector. The government announced in the Pre Budget Report that it was going to cap public sector wage increases to 1%, but only from 2011.
Tags: average earnings, Employment, employment rate, unemployment, unemployment rate, youth unemployment
Posted in Earnings, Employment, unemployment | No Comments »
Tuesday, December 15th, 2009
The CPI annual inflation rate rose to 1.9% in November following a rise of 1.5% in October. This increase was faster than expected and was mainly due to changes in transport prices, with the largest effect coming from fuels and lubricants. In this category, prices rose by 2.8% between October and November this year but fell by a huge 8.3% twelve months earlier.
According to the ONS there were small upward pressures from clothing and footwear and household and household services, whilst the largest downward pressure came from food and non-alcoholic drinks.
This increase in CPI was the biggest increase since May 2009 and CPI is expected to rise above its 2% target rate in the New Year when VAT is returned to its 17.5% rate from the temporary 15% rate operating at the moment.
The latest trends can be seen in the figure below.
 Source: ONS
Also, in the year to November, RPI inflation was 0.3% compared with a rate of -0.8% in October. According to the ONS such a rise of 1.1% has not been seen since April 1990 when the monthly increase was from 8.1% to 9.4%. Apart from the factors which influenced changes in the CPI there was also upward pressure from housing, mainly from mortgage interest payments which rose this year after falling a year ago.
The RPIX inflation rate, which excludes mortgage interest payments, was 2.7% in November, up from 1.9% in October.
Tags: CPI, Inflation, RPI, RPIX, VAT
Posted in Consumer Price Index, Inflation | No Comments »
Monday, December 14th, 2009
HM Revenue & Customs published a piece in the printed Pre Budget Report called Protecting Tax Revenues 2009. In this they projected that there was a “tax gap” of 8%, which means of the total tax which they would expect to receive they are unable to get their hands on 8%. And, 8% is not a trifling matter, as it adds up to a missing £40bn a year, which if recouped, would go a long way to offset the government’s current borrowing requirement.
They identified eight areas where tax gets ‘lost’. These are avoidance, legal interpretation, evasion, failure to take reasonable care, criminal attacks, hidden economy, non-payment and error. The percentage each of these contributes to lost revenues can be seen in the pie chart below.
 Source: HMRC Pre Budget Report
However, some of these areas are difficult to recoup. For example, tax avoidance is a legitimate way of paying less tax, whereby skilled accounting companies advise firms how to legally avoid tax, often by identifying loopholes in government legislation. Also, legal interpretation is where there are differing viewpoints taken by the revenue and taxpayers as to the interpretation and meaning of specific pieces of legislation. Added to this, non-payment is often due to the fact that companies have ‘gone under’ and no longer exist as the legal entity which had an outstanding tax bill.
According to HM Revenue & Customs they have increased by 60% the amount of money they have been able to retrieve from those making errors or being unwilling to pay, over the past three years. Their compliance department raised £12bn last year in this way.
The Revenue also notes that other countries have a greater “tax gap” than the UK. For example, this is put at 14% for the US and 10% in Sweden.
But, was it wise for the Revenue to announce these projected figures at the moment, especially as much of it is guesswork. Given that the government is preparing us for higher taxes and reduced government spending, taxpayers might be more than a little “miffed” that they are being asked to tighten their belts when so much legitimate tax appears to be going missing.
To see the whole article click here.
Tags: government borrowing, government expenditure, taxation
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Friday, December 11th, 2009
After next year the government will be scrambling to raise money anywhere it can as well as making swingeing cuts on spending. Additional tax on bank bonuses has already been announced, but other sectors may eventually be drawn in, such as the energy sector.
Since the Treasury refused to give a detailed breakdown of spending cuts following the Pre Budget Report (PBR) yesterday, the government has received criticism from just about every quarter. The Institute for Fiscal Studies in its response to the PBR pointed out that there is a ‘black hole’ in the government’s calculations. They suggest that of the £35.7bn cuts that need to be made by government departments after 2011, £15bn has not been accounted for in terms of where the cuts will be made.
The government has announced that it would ringfence the spending on schools, hospitals and the overseas aid. Therefore, the cuts are going to fall even more heavily on other departments such as defence, transport, housing and higher education. The IFS estimate that these and other departments will have to find cuts of 6.4% per year between 2011 and 2014. This could see such areas losing nearly a fifth of their current expenditure.
David Cameron, leader of the Conservatives used most “unparliamentary” language by accusing Labour of “basic deceit and complete lack of moral principle.”
The IFS said that the impact of additional taxes would fall “overwhelmingly” on the top 10% of earners, and that their income will be cut by 5% by 2012, other things being equal.
The IFS also estimates that the cost of paying back these debts will total £2,400 per year for every family in the UK over the next eight years.
I would suggest you take your Christmas presents back to the shops, get refunds and start saving. Oh, and a merry Christmas.
Tags: government borrowing, government spending, taxation
Posted in government borrowing, government spending, taxation | 2 Comments »
Thursday, December 10th, 2009
A reduction in bingo duty from 25% to 20% was the centrepiece of yesterday’s Pre Election Manifesto – sorry, Pre Budget Report – presented by chancellor, Alistair Darling.
Whilst it’s true that the chancellor had all the room to manoeuvre of a man holding a wake in a telephone box, he actually played safe by doing ….well…..doing virtually nothing. His rationale went something like this. The current government has done really well in holding everything together during the worse recession since the 1930s. If it hadn’t been for the rescue of the banks, the huge fiscal stimulus and the quantitative easing, the UK would now be twinned with Iceland.
He announced a slight increase in his estimate of UK borrowing costs this year, which will now reach £178bn compared to the earlier Budget forecast of £175bn. However, next year borrowing will be £176bn. You see the difference? No, okay then let me explain. In actual fact the government is not going to take any tough decisions on lending cuts for another year. The reason for this is that cutting back on expenditure now will undermine the recovery and perhaps lead to a “double dip” recession.
This has absolutely nothing to do with the fact that there is a general election due early next year and the fact that government ministers do not wish to add to the rising unemployment levels by losing their jobs. Well, it makes sense doesn’t it? This means that all the tough decisions on spending cuts will have to be deferred until after the election. And the chancellor did not give us even the tiniest clue as to how these reductions would be achieved. However, borrowing will be cut to £82bn by 2014-15.
There is to be a cap of one per cent on public sector pay for two years from 2011 (not next year of course) and there will be an increase in national insurance contributions of 0.5% from 2011 which is on top of the 0.5% which was announced in April’s Budget. This did not go down well with struggling small businesses although the proposed one per cent increase in corporation tax has been put off for twelve months.
The government has also identified a few billion pounds in efficiency savings but it seems that they will actually be spending these.
In fact, I am going to make my own efficiency savings, so if you want to see the minutiae of the Pre Budget Report with all the forecasts for debt, borrowing and expenditure you can see them on the Treasury’s microsite by clicking here.
Tags: corporation tax, fiscal policy, government spending, national insurance, pre budget report, Public Finances, spending cuts
Posted in Fiscal stimulus, Public Finances, government borrowing, government spending | No Comments »
Wednesday, December 9th, 2009
Mr Brown has just launched an attack on public sector pay which he describes as “excessive”. He announced the government’s paper on smart government, saying: “It cannot be right that taxpayers fund 300 local authority officials who have salaries over £150.000 or that in total over 300 staff across public sector bodies are paid more than £200,000.”
How is it that a man who has just spent 10 years as chancellor of the exchequer and 2 years as prime minister has only now discovered that there is ‘excessive’ pay in the public sector? I don’t suppose people will think that this is anything to do with the forthcoming election will they?
It seems Mr Brown is set on “naming and shaming” those civil servants and members of quangos earning over £150,000 per year. I think if I were earning over £150,000 per year of taxpayers money, I could put up with quite a lot of shaming. Water off a duck’s back comes to mind.
 Public sector services are now officially in the firing line. By contrast, the centre-right Reform think tank has just said that public sector employment costs need to fall by 15%, which is equivalent to one million jobs. Their director Andrew Haldenby said: “Politicians have to be more honest with the public about what needs to happen if they are to reduce the deficit. Radical changes won’t happen if they see their roles as defenders of the status quo. The public sector workforce has to shrink to become as productive as the private sector.”
Interestingly, Professor Greg Mankiw of Harvard mentions in his blog this week that he asked his freshman students how their views had changed over the course of the semester. He said: “Those who started out liberal said they came to appreciate market mechanisms more. Those who started out conservative said they came to appreciate the market’s limitations. In other words, after a few months of reading and discussing economics and public policy, most of them moved toward the political center and closer to agreement.”
Perhaps that is what we can expect in the UK. When the pendulum stops swinging it always ends up back in the centre, and no doubt there will be just enough fat taken off the public sector to appease voters, but not so much as would damage front-line services.
Tags: Earnings, Employment, public sector
Posted in Earnings, Employment, Public Finances | No Comments »
Tuesday, December 8th, 2009
International mergers and acquisitions are forecast to decline by 56% in 2009 compared with 2008, the largest year-on-year decline since 1995. This estimate is based on OECD analysis of data for international M&A activity up to 26 November 2009.
This fall is largely due to the 60% decline in value of cross-border merger and acquisitions (M&A) by firms based in the OECD area, from over $1 trillion in 2008 to $454 billion in 2009.
However, it was also due to the first sharp declines in M&A activity into and from major emerging economies: international M&A activity by firms based in Brazil, China, India, Indonesia, Russia, and South Africa fell by 62% to $46 billion in 2009 from $121 billion in 2008.
 International business investment has collapsed this year.
M&A activity into these countries is forecast to decline by almost 40% this year to just over $80 billion from just under $140 billlion in 2008.
Speaking at the opening of the OECD Global Forum on Investment in Paris, OECD Secretary-General Angel Gurría said that governments needed to do more to promote business investment. “Against the backdrop of a fragile global economy and sharp declines in international investment activity that have now spread to the emerging economies, the international investment policy community cannot afford to relax.”
“Investment protectionism poses a grave risk to recovery by further reducing international investment flows just at a time when these are most needed. Global challenges also require investment on a scale that far exceeds available public resources. Business investment is an essential part of the solution,” he added.
These latest international investment estimates suggest that total foreign direct investment into the 30 OECD countries will fall to $600 billion in 2009 from a 2008 total of $1.02 trillion.
Tags: international investment, mergers and acquisitions
Posted in Foreign Direct Investment, Investment | No Comments »
Monday, December 7th, 2009
So starts an article published last week by Robin Wells on the guardian.co.uk website. The title of her article is: Big savers got us into this mess, as well as big spenders.
She starts by saying that the global savings glut is the source of our economic problems as well as an obstacle to our recovery and claims that the culprits are “thrifty Germans and state-owned enterprises in China…”
Wells notes that the cause of this “flood of savings” is due to the trade surpluses which both these countries have generated over the past ten years and claims that the world is saving more than can be profitable invested. She says: “The corollary is that, eventually, those funds will earn less than nothing. And through financial engineering, those losses are now distributed around the world.”
 Is too much saving as much a problem as too much spending? “Until the savings glut is vanquished, asset bubbles and instability will be fed, exacerbating income inequality and favouring wealthy bankers and the Chinese elite. It will continue drawing resources away from productive sectors of the economy and channelling them into high-paying but socially useless financial engineering – or into yet more excess capacity.”
“Short of a miraculous new technology to soak up the savings glut, a global rebalancing of production and consumption will be necessary. Persistent surplus countries will need to save less and consume more: deficit countries will need to consume less and save more.”
To read the whole article click here.
For Economics course and revision books click here.
Tags: savings, trade surpluses
Posted in savings | No Comments »
Thursday, December 3rd, 2009
This is the title of a talk given by Spencer Dale, Chief Economist at the Bank of England yesterday in which he discusses the policy response to the economic downturn, evidence that the economy has stabilised, and the prospects for 2010 and beyond.
In it he notes that the MPC’s interest rate decisions have acted to improve companies’ cash flow and lower the monthly repayments of households holding floating rate mortgages, while encouraging both groups to spend rather than save. He adds that the MPC’s programme of asset purchases has further stimulated demand by reducing yields across a range of assets and lowering the cost of company finance. He believes these measures, in combination with the range of Government policies, “…have been successful and the risk of a severe adverse feedback loop…avoided”. As evidence, he points to the rises in corporate insolvencies and unemployment, both of which have not increased by as much as might have been feared on the basis of past recessions.
He continues by looking at the prospects for 2010 and beyond. Spencer Dale states that: “The economy appears to have turned” and “…we are likely to be moving into a period of renewed expansion”. He points to the depreciation of sterling as providing additional support to the recovery, along with the further boost to output expected as the adjustment of inventories by companies runs its course. He warns however that “…the emerging recovery should not obscure the fact that structural adjustments need to occur in our economy”. He notes that monetary policy cannot and should not prevent these adjustments happening. But he says, “…the job of monetary policy…is to ensure that these adjustments occur in as orderly a manner as possible and within an economic environment which is consistent with hitting the 2% inflation target”.
Spencer Dale concludes by reflecting on the most recent monetary policy decision and his vote to maintain the level of asset purchases at £175bn in November in contrast to other Committee members who wanted an increase. He says it is important not to make too much of this difference. His main concern reflected the considerable uncertainty about the degree of spare capacity in the economy and the behaviour of inflation when output is growing at above trend rates, adding that his preference “…was to aim to grow the economy a little less rapidly”. To read the whole speech click here.
Tags: asset purchases, Bank of England, monetary policy, MPC, quantitative easing
Posted in Bank of England, Monetary Policy Committee | No Comments »
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