A large deficit which needs cutting and this needs decisive action. This was the gist of the message from George Osborne, and generally from the Coalition government. Although there is nothing confirmed in terms of what to expect, it is thought that there will be a proposal to ease National Insurance for new businesses. He said:
“And so we’ve got to deal with that [the country in Europe with the largest budget deficit of any major economy]. In that sense it’s an unavoidable Budget, but what I’m determined to do is to make sure that the measures are tough but they’re also fair and that we’re all in this together and that, as a country, we take the steps necessary to actually provide the prosperity for the future.”
We already know that there are plans in place to increase capital gains tax from 18% to nearer 40%, but beyond that, little is known. There are concerns that this policy may actually cost the government more in tax revenue than it will raise. Other policies we might expect include a rise in VAT, and a slashed spending budget for pensions. These spending cuts and tax rises will help Osborne to eliminate the structural deficit in current spending by 2015, when the Coalitions’ current term comes to an end. The success of the Coalition’s policies and their ability to reduce the deficit without causing the economy to fall back into recession will be crucial in determining whether the current term is the only term.
Budget 2010: Britain on ‘road to ruin’ without cuts (including video) BBC News (20/6/10)
Where could spending axe fall? BBC News (9/6/10)
George Osborne says emergency budget cuts will be ‘tough but fair’ Guardian, Larry Elliott, Toby Helm, Anushka Asthana and Maev Kennedy (20/6/10)
Budget 2010: capital gains tax Telegraph (20/6/10)
What’s the Chancellor planning to take away in reverse Christmas budget Independent, Alison Shepherd and Julian Knight (20/6/10)
Public borrowing at a peak, says ONS, but tough budget awaits Independent, Sean O’Grady (20/6/10)
A bloodbath none was prepared for Financial Times, Martin Wolf (22/6/10)
Questions
- To what extent is it necessary to cut the budget deficit now and not delay it until the recovery is more secured?
- How will easing National Insurance for small businesses affect the economy?
- If capital gains tax goes up, why is there concern that this could actually cost the government? How is this possible?
- The Lib Dems will oppose any increase in VAT, as they argue it is a regressive tax. What does this mean?
- How will the report by the Office for Budget Responsibility have affected Osborne’s emergency budget?
- What is the structural budget deficit? Illustrate it on a diagram.
The annual Agricultural Outlook for the next ten years has just been published jointly by the OECD and the UN Food and Agriculture Organization (FAO). Click here and here for audio presentations of the report by the FAO’s Jacques Diouf and the OECD’s Angel Gurría.
The report argues that world recovery will raise agricultural prices. This will be partly the direct result of higher demand and partly the result of higher prices of agricultural inputs, such as fertilisers and fuel. But prices will not rise back to the peak levels of 2007/8. These higher prices, however, would have a positive effect on world food output, especially in the BRICs (Brazil, Russia, India and China). This, in turn, would limit the price rises.
So is this good news for food producers and consumers? The following articles look at the issues
Articles
Economic upturn, energy to lift farm prices-FAO/OECD Reuters, Gus Trompiz (15/6/10)
Higher average farm prices expected, food security concerns persist, say OECD and FAO FAO Media Centre (15/6/10)
Food commodity prices to rise Financial Times, Javier Blas (15/6/10)
Price increases fuel fears of food ‘crises’ Financial Times, Javier Blas (15/6/10)
Emerging economies ‘to enjoy food production boom’ BBC News (15/6/10)
Rising crop prices can be ‘good news’ for farmers: UN/OECD MSN News, Malaysia (15/6/10)
Food prices to rise by up to 40% over next decade, UN report warns Guardian (15/6/10)
Wheat, oils and dairy prices to stay up 40% for next decade, FAO BakeryAndSnacks.com, Jess Halliday (15/6/10)
Food prices could soar up by 40 per cent in next decade, UN report warns UN News Centre (15/6/10)
Report and data
OECD-FAO Agricultural Outlook 2010-2019: portal page OECD and FAO
OECD-FAO Agricultural Outlook 2010-2019: Highlights OECD and FAO
OECD-FAO Agricultural Outlook 2010-2019: Database OECD and FAO
Commodity prices Index Mundi
Questions
- Explain what is likely to happen to food prices. What are the explanations given in the report?
- Represent the analysis on a supply and demand diagram (or diagrams).
- What is the relevance of (a) income elasticity of demand, (b) price elasticity of demand, (c) cross-price elasticity of demand, (d) price elasticity of supply, in explaining the likely future movements of food prices and why some food prices are likely to rise faster than others?
- What factors are likely to impact on the production of food in developing countries?
Throughout 2009/10, a new millionaire was created in Brazil every 10 minutes – not bad for a developing country! Despite the global recession, Brazil has managed growth of almost 5% and is set to overtake both the UK and France to become the world’s 5th largest economy. Brazil will hold the next World Cup and the Olympic games after London, bringing it further recognition as a global power. It has the third largest aircraft manufacturing industry in the world and is even doing its bit to tackle climate change, with 50% of its cars running on bio-fuels. It exports more meat than any other country and is looking to become an energy power. With falling unemployment, a buoyant economy, growing confidence, fantastic beaches and 6 millionaires created every hour, Brazil looks like the perfect place to live.
However, that is just one side of the story. Brazil is still a country with deep poverty – approximately 60 million people. The slums, or favelas, are home to 1 million people in Rio alone, where unemployment is high and drug wars common. There has been a concerted effort to reduce the drug trafficking business, but this has only created more unemployment. There is little sanitation, poor electricity and minimal chance of escape. Neighbourhoods need rebuilding, and despite high growth and arguably the most popular president in the world (Lula da Silva), there are calls for political, social, taxation and labour market reforms. This cycle of poverty and the equality gap needs addressing before the Brazilian economy can really be considered a global power.
Webcasts and podcasts
Will Brazil’s economy keep growing? BBC News, Matt Frei (27/5/10)
Brazil’s bid to be ‘world’s breadbasket’ BBC World News America, Paulo Cabral (26/5/10)
Tackling Brazil’s poverty BBC World News America, Gary Duffy (28/5/10)
Brazil’s development spurs economic quality hopes BBC World News America, Matt Frei (27/5/10)
Brazil’s air industry takes off BBC World News America, Paolo Cabral (24/5/10)
‘Our growth quality is better than China’ BBC World News America, Marcelo Neri (25/5/10)
Brazilian economy poised to overtake UK’s BBC News Today, Matt Frei (27/5/10)
Data
Economic data Banco Central do Brasil
Brazil Economy EconomyWatch
Brazil CIA World Factbook
Brazil Geognos
Brazil data World Bank
Questions
- What are the main causes of (a) inequality and (b) poverty in an economy? What is the difference between these concepts?
- How does the government subsidised housing programme aim to help low income households. Use a diagram to illustrate the effect.
- What policies can be used to reduce the equality gap?
- Are those living in the favelas in absolute poverty? How do we distinguish between absolute and relative poverty? Is it the same across the world?
- What are the adverse effects of fast growth in Brazil?
Labour’s Chancellor, Alistair Darling, delivered his last budget on the 24th March 2010. However, with the new Coalition government planning to make more substantial cuts and with George Osborne and other ministers claiming to find ‘black holes’ in the budgets left by Labour, an emergency budget will take place on the 22nd June 2010. The Coalition government has agreed to make £6 billion of spending cuts in the current year in a bid to reduce the UK’s substantial budget deficit, which stands at nearly 12% of GDP. Vince Cable told the Times:
I fear that a lot of bad news about the public finances has been hidden and stored up for the new government. The skeletons are starting to fall out of the cupboard.
There are plans to reform capital gains tax, possibly increase VAT to 20% and remove tax credits from some middle-income families. In Alistair Darling’s budget, it was middle-income families who were among the ‘losers’, with tax rises of around £19 billion, and it looks as though middle-income families may be hit again. Throughout the election all parties pledged to continue to help the poorest families, but there appears to be a lot of uncertainty ahead for middle-income families. They are likely to face reduced benefits and higher taxes as the Coalition government tackles the £163 billion deficit.
Despite critics of spending cuts arguing that it could cause a double-dip recession, the government is confident that cutting spending now is the right thing to do. As Osborne told GMTV:
I am pretty clear that the advice from the Governor of the Bank of England was that [cutting spending now] was a sensible thing to do, and if there is waste in Government that people at home are paying for with their taxes, let’s start tackling that now.
Chancellor launches audit of government spending Independent, Andrew Woodcock (17/5/10)
Osborne to give details of £6bn spending cuts next week (including video) BBC News (17/5/10)
Savings cuts to ‘hit middle class families’ BBC News (15/5/10)
Osborne to deliver emergency budget on June 22nd Times Online, Susan Thompson (17/5/10)
David Cameron declares war on public sector pay Telegraph, Rosa Prince (16/5/10)
All eyes on the emergency Budget Financial Times, Matthew Vincent (14/5/10)
Tax rises likely under Coaliation government, says Institute of Fiscal Studies Telegraph, Edmund Conway (13/5/10)
Questions
- What will be the likely impact on middle-income families if proposed spending cuts go ahead? How might this affect the recovery?
- What are the arguments for a) cutting spending now and b) cutting spending later?
- In the future, the Coalition government plans to limit bonus payments. How might this policy affect jobs and recruitment?
- What is the likely impact of the future increase in personal tax allowance? Who will it benefit the most?
- How are the proposals for corporation tax and capital gains tax likely to affect the economic recovery?
- Is a rise in VAT a good policy? Who will it affect the most? Will it reduce consumption and hence aggregate demand or is it likely simply to raise tax revenue? (Hint: Think about the type of tax that VAT is.)
House prices are on the rise again and at the fastest rate since June 2007, according to the Nationwide. In June 2007, the average house price was £184,070, which did prevent many first-time buyers from getting on to the property ladder. Enter the recession. Over the past two and a half years, house prices have fluctuated considerably. Land Registry data shows that the average house price in April 2009 had fallen to £152,657, which gave first time buyers more of a chance, but at the same time mortgage lending fell and many lenders required a 25% deposit, which again ruled out many purchasers. Gradual increases in the latter part of 2009 and the beginning of 2010 have seen the average price rise to £164,455 (£167,802 according to Nationwide) and the trend looks unlikely to reverse, although it should stabilise.
Behind these changing prices is a story of demand and supply and the importance of expectations. As the credit crunch began and house prices began to fall, those looking to sell wanted to do so before prices fell further, while those looking to buy were expecting prices to fall further and so had an incentive to delay their purchase. In recent months, however, the demand for houses has out-stripped supply and it is this that has contributed to rising prices. At the same time, the stamp duty holiday that ended in December 2009 was re-introduced in the 2010 Budget and mortgage approvals have begun to increase. All of this has led to annual house price inflation of 10.5% by April 2010.
Articles
House price inflation hits 10.5%, says the Nationwide BBC News (29/4/10)
House price rise reaches double digits, finds Nationwide Telegraph, Myra Butterworth (29/4/10)
House price growth hits three-year high Times Online (29/4/10)
Taylor Wimpey says house prices rise 9pc Telegraph (29/4/10)
Bringing down the house price Guardian (27/4/10)
Data
House Price Data Nationwide
April 2010 Press release Nationwide
Halifax House Price Index site Lloyds Banking Group
(see especially the link to historical house price data)
House Price Index site Land Registry
Questions
- Using a diagram, explain why house prices fell towards the end of 2008 and the beginning of 2009.
- Using your diagram above, now illustrate why house prices have begun to increase.
- Is the demand and supply of houses likely to be price elastic or inelastic? How does this affect your diagrams from questions 1 and 2?
- Why is the upward trend expected to stabilise during the latter part of 2010?
- To what extent has the stamp duty holiday affected house prices?
- Has the recession had an impact on equality in the UK economy?
- Will rising house prices contribute to economic recovery. Explain why or why not.