A keenly awaited Budget, but what should we have expected? Chancellor Alistair Darling had warned that it wouldn’t be a ‘giveaway’ budget. The aim to cut the budget deficit in half over 4 years still remains and the UK economy is certainly not out of the woods yet.
You’ve probably seen the debate amongst politicians and economists over what should happen to government spending and it might be that the lower than expected net borrowing for 2009-2010 provides a much needed boost to the economy. With the election approaching, it seemed likely that some of this unexpected windfall would be spent. The following articles consider some key issues ahead of the 2010 Budget.
Budget 2010: Alistair Darling’s election budget BBC News, Stephanie Flanders (21/3/10)
Build-up to the Budget Deloitte, UK March 2010
Pre-Budget Report: What Alistair Darling has announced before Guardian, Katie Allen (9/12/09)
Budget 2010: Darling warns of ‘no giveaway’ BBC News (11/3/10)
FTSE climbs ahead of UK Budget Financial Times, Neil Dennis (24/3/10)
Bank bonus tax could net Treasury £2bn, E&Y says Telegraph, Angela Monaghan (24/3/10)
Alistair Darling set for stamp duty move BBC News (24/3/10)
Labour has run out of steam, says David Cameron Guardian, Haroon Siddique (24/3/10)
Ten things to look out for in the 2010 Budget Scotsman (24/3/10)
Sammy Wilson predicts ‘neutral budget’ BBC News, Ireland (24/3/10)
Do the right thing, Darling Guardian (24/3/10)
What do we want from the Budget? Daily Politics (23/3/10)
Budget boost for Labour as inflation falls to 3% TimesOnline (24/3/10)
Questions
- Why has the FTSE climbed ahead of the Budget?
- Why is there a possibility of a rise in stamp duty again? To what extent do you think it will be effective?
- Net borrowing for 2009/10 is expected to be lower than forecast. What should happen to this so-called ‘windfall’?
- What is expected from the Budget 2010? Once the Budget has taken place, think about the extent to which expectations were fulfilled.
- Why are excise duties on goods such as taxes and alcohol likely to be more effective than those on other goods?
Is there finally cause to celebrate? Government borrowing is lower than expected. Initially, public sector net borrowing for 2009-2010 was forecast in the Pre-budget Report to be £178bn, but official public figures have reduced this to £170 bn. The fall in government revenues has not been as big as predicted and as a result, borrowing this year is likely to be between £5bn and £10bn less than expected. But, let’s not crack open the champagne quite yet, as February’s figures for public sector net borrowing are still about 41% higher in 2010 than in the same month last year.
Whilst the UK is predicted to under-shoot its public-sector net cash requirement made in the Pre-Budget Report for 2009-2010, government borrowing remains at a record high and the level of the deficit is still a worrying 12% of GDP. It is, therefore, hardly surprising that the European Commission wants the UK to bring its deficit down faster than the current government plans – and the Commission is not alone. There is considerable debate at the moment between those who want the government to bring the deficit down quicker to appease the market and those who want the government to start taking strong measures only when the recovery is well established. Their fear, very much in the Keynesian school, is that cutting too soon, by reducing aggregate demand, would push the economy back into recession.
If government spending is to be restrained, can we rely on export-lead growth? The fall in the value of our currency over the past two years should have meant a boost for exports. With a weaker pound, export growth was expected to be strong and allow us to export our way out of recession. See the news blog Expecting too much from exports. However, with figures in January 2010 showing the biggest trade deficit since August 2008 (£3.8bn) and with the volume of exports down by 8%, this may not be the case. Whilst the credit rating of the UK remains at AAA, experts say that the government should be aiming to reduce the deficit more quickly in order to retain this rating. So, although there is some good news (government borrowing will only be £170bn!) and exports are likely to increase as the global economy recovers from recession, significant problems in the UK economy still remain.
Articles
Row over leaked EU deficit report AFP news (17/3/10)
Government borrowing less than forecast BBC News (18/3/10)
Borrowing update cheers Treasury Financial Times, Chris Giles (19/3/10)
UK trade deficit widens to biggest in 17 months BBC News, Stephanie Flanders (9/3/10)
Government borrowing: what the economists say Guardian (18/3/10)
Darling to use higher revenues to cut debt Financial Times, Chris Giles and Jean Eaglesham (19/3/10)
Data
Public sector finances. February 2010 Office for National Statistics
Questions
- Why have government revenues been falling?
- What is the difference between the public-sector net cash requirement and public-sector debt?
- Why is a weak pound good for exports?
- As the global economy recovers, UK exports should begin to rise. Illustrate this idea with a circular flow of income diagram for the UK and the rest of the world.
- What are the arguments (a) for and (b) against reducing the government deficit now?
- Should the Treasury be celebrating these latest figures, or is the UK economy still in a bad way?
In the Perils of snow and stamp duty blog here on the Sloman Economics News site we noted two particular influences that may have contributed to February’s reported fall in UK house prices: the end of the stamp duty holiday and the poor winter weather. Here we ponder a little more on the recent relationship between the economic and house prices cycles and, more generally, on the significance and causes of the recent imbalances between housing demand and supply.
What is particularly interesting about February’s house price fall (the Halifax put the fall at 1½% and the Nationwide at 1%) is that it is happening just after the economy reportedly grew by 0.3% in the last quarter of last year. But, then again, the house price fall is a reversal of an upward trend that started back in the summer of 2009 when the economy was still contracting! One’s gut reaction might be that cycles in house prices and economic growth ought to coincide. One reason for this is that the growth in income of the household sector will reflect the phase of the business cycle that the economy is in. For instance, during the slowdown or recessionary phase, like the period during 2008/9, the household sector’s income is likely to be shrinking and this will impact on housing demand. The magnitude of the effect on demand will depend on the sensitivity of housing demand to changing incomes – something that economists refer to as the income elasticity of demand.
We can, despite what might appear to be the recent puzzling behaviour of UK house prices, apply the concepts of demand and supply to gain some insight into what has been driving house prices. One way of thinking about the concepts of housing demand and supply is to relate them respectively to the number of ‘instructions to buy’ and the number of ‘instructions to sell’ on an estate agent’s book. We can then try and think of factors which might influence, in a given period, the number of instructions to buy and sell.
One possible explanation of the house price growth of last year is that despite the household sector’s shrinking income there were in fact a number of relatively cash-rich households out there, partly because the lowering of interest rates meant that the debt-servicing costs on variable rate mortgages fell. This left some households with more discretionary income to spend or to use to increase their housing investment by trading-up between one housing market and another. The key point here is if there is not a similar increase in the number of instructions to sell then the imbalance between the flow of instructions to buy and instructions to sell results in upward pressure in prices. In those markets where the imbalance between demand and supply is greatest price pressures are most acute. This appears to have been especially true last year in particular markets in the south of England.
So what of February’s fall? Well, again we have to think about the balance between instructions to buy and sell. What appears to have happened is that the demand pressures that built up in some markets lessened. And, as we consider elsewhere on this site, it is perhaps even the case that the wonderful British weather ‘played a hand’ by discouraging some households from looking to buy and adding to our estate agents’ lists of instructions to buy.
Articles
UK housing recovery running out of steam CITY A.M., Jessica Mead (5/3/10)
UK house prices ‘lose momentum’, say Nationwide BBC News (26/2/10)
UK house prices see first fall since June, says Halifax BBC News (4/3/10)
Fears grow of double dip for UK housing market The Independent, Sean O’Grady (5/3/10)
Data
Halifax House Price Data Lloyds Banking Group
House Prices: Data Download Nationwide Building Society
Questions
- What do economists mean by the income elasticity of demand? How income elastic do you think owner-occupied housing demand is likely to be?
- How important do you think current house prices are likely to be in affecting the number of instructions to buy and instructions to sell in the current period?
- How important do you think expectations of future house prices are in affecting the number of instructions to buy and sell in the current period?
- What role might financial institutions, like banks and building societies, play in affecting UK house price growth in 2010? How might their influence compare with that in the period 2008/9?
- Rather than economic growth affecting house prices, is it possible that house price growth could affect economic growth?
Is this a problem you find when you go shopping? Maybe that’s because the shop that sells it has closed. A report by the Local Data Company has revealed that one in eight shops stand empty on Britain’s high streets, after the recession saw vacancies shoot up by 24% in the second half of 2009. The number of empty town-centre shops climbed to 17,880 in the second half of 2009, equivalent to 12% of the 149,000 shops covered by the research.
Margate in Kent and Wolverhampton in the Midlands were two of the worst-hit areas, where vacant shops stood at 27% and 24% respectively. Take a stroll down a high street in almost any city or town in the UK and you are bound to see ‘Shop for let’. We’ve seen Woolworths and Borders close down and Threshers’ parent company collapse. But these stores have largely remained empty.
Empty houses have also been a problem as the number of repossessions increases. Statistics show an average of 126 people a day were thrown out of their homes in 2009. What is the explanation behind this?
An obvious answer is the recession. As shops felt the strain of low demand, some were simply unable to cope and they shut down as a result. At the same time, new firms were reluctant to take the risk and enter the market during an economic downturn – and who can blame them?
However, are there other reasons why Britain’s high streets are seeing more and more empty shops? The following articles look at the reshaping of our high streets and some of the explanations behind it.
Empty Shops
Shops ‘empty due to recession’ The Press Association (11/2/10)
UK recession has left one in eight shops empty Telegraph, Graham Ruddick (11/2/10)
Bradford second worse for empty shop premises Telegraph and Argus, Will Kilner (11/2/10)
25% of town shops now empty Express and Star (11/2/10)
British town centres in crisis, conference told Reuters, Sinead Cruise (10/2/10)
Empty shop numbers continue to rise in UK Property Week, Laura Chesters (10/2/10)
Empty shops caused by more than recession Startups (12/2/10)
Empty Homes
Buy-to-let: Landlords blow as tenants struggle to pay Telegraph (11/2/10)
Housing Minister says repossession is the ‘best thing’ for homeowners Telegraph, Myra Butterworth (11/2/10)
Home repossessions at highest since 1995 This is Money (11/2/10)
Questions
- What are the main factors behind the high number of empty shops? Use a demand and supply diagram to illustrate these factors.
- In the Startups Article, the BRC Director says: “High street shops are often battling big bills for business rates and rents, parking and access difficulties, as well as failure to manage and invest in the area.” Illustrate this on a diagram and explain how this effect has contributed to empty shops.
- To what extent is more internet shopping the main cause of the problem? Why is it cheaper to run a business via the internet than on a high street?
- Why have some cities and towns been more affected than others?
- Is there a link between empty shops and repossessions?
- What more could the government and local councils do to try to encourage businesses to set up on the high street?
With the majority of developed countries now moving out of recession, many people will think the worst is over. But for some countries and some people, there may be worse to come. The single currency in the eurozone was introduced in 1999 and in December 2009, the eurozone saw its highest level of unemployment at 10%. There are now 23 million people unemployed across the 16 countries that make up the eurozone and many of those people reside in Spain, where unemployment has reached a 12-year high of 18.8% and is even expected to reach 20%.
Interest rates in the eurozone and in the UK have been maintained at 1% and 0.5% respectively, and inflation has seen a rise in both places. Whilst in the eurozone inflation remains well below the inflation target, in the UK there has been a rapid rise to 2.9% to December 2009 (see Too much of a push from costs but no pull from demand)
While Spain is suffering from mass unemployment, Greece is struggling with the burden of a huge budget deficit. The former European Central Bank Chief Economist, Otmar Issing, has said that any bailout of Greece would severely damage the Monetary Union and “The Greek disease will spread”. With concern that Greece will not be able to service its debt, there is speculation that the country will be forced out of the currency bloc. However, the chair of the single currency area’s finance ministers said that Greece will not leave the eurozone and does not believe that a state of bankruptcy exists.
So, what’s behind rising unemployment, rising inflation and rising budget deficits and how are they likely to affect the eurozone’s recovery?
Eurozone inflation rises to 0.9% BBC News (15/1/10)
Unemployment sector remains beat in Eurozone pressuring price levels FX Street (29/1/10)
greek bailout would hurt Eurozone – Germany’s Issing Reuters (29/1/10)
Eurozone unemployment rate hits 10% BBC News (29/1/10)
Greece will not go bust or leave Eurozone Reuters, Michele Sinner (27/1/10)
Eurozone unemployment hits 10% AFP (29/1/10)
New rise in German job loss total BBC News (28/1/10)
Spain unemployment nears 12 year high Interactive Investor (29/1/10)
Questions
- How do we define unemployment? What type of unemployment is being experienced in the eurozone?
- Why do you think unemployment levels have risen in the eurozone and in Spain in particular? Illustrate this on a diagram.
- What are the costs of unemployment for (a) the individual (b) governments and (c) society?
- What explanation can be given for rising levels of both unemployment and inflation?
- Inflation in the eurozone increased to 0.9%. What are the factors behind this? Illustrate the effects on a diagram.
- Greece’s forecast budget deficit for 2009 is 12.7% of GDP, but Greece has said it will reduce it to 8.7% of GDP. How does the Greek government intend to do this and what are the likely problems it will face?
- Why could bailing out Greece hurt the eurozone?