Global Economics Weekly Brief
UK Government Statement Explained...
The UK Government Autumn Statement was a game of two halves (see details below). The Office for Budget Responsibility’s (OBR) forecasts added to confidence that the UK economy will continue to motor along nicely.
But the job of mending the public finances is far from done and the projections show just how big the challenge to cut spending in the next parliament will be. Many more cuts on the way to try and `Balance` the UK finances which are £1.5 trillion in debt and growing rapidly!
Pockets relieved. The OBR provides independent forecasts of the economy and the public finances. Despite some downgrades to growth from 2016 onwards, the OBR envisages an economy humming along nicely at above 2% next year and beyond. It's a solid outlook but rests on one key assumption: real wage growth moves firmly into positive territory over the coming year providing a big relief for household finances. More people moving into the UK looking for jobs will put far more pressure on the resources of the NHS/Benefits/housing etc!
But UK government squeezed. The OBR’s message on the UK government's budget deficit was a familiar one: eliminating it remains difficult and time-consuming. The deficit is forecast to fall by just £6.3bn this year to £91.3bn. That’s half the decline that was expected in March. Lower tax receipts are to blame. So ensuring the public finances move into surplus by 2018/19 rests on two things. Firstly, the departmental squeeze on spending will be tightened further from 2016/17. Second, lower government bond yields mean lower debt interest payments. Far more cuts in spending will be needed to balance the UK finances!
Productivity. Completing the deficit reduction journey also rests on higher productivity. To that end, the Chancellor looked to provide a helping hand with support to small firms (extending Small Business Rate Relief and the Funding for Lending Scheme), investments in roads (£15bn in road infrastructure improvements, already announced) and skills (£10k loans for post-graduate studies). Where is the money coming from for these projects?
Stamp of approval. The headline-grabbing announcement of the UK Autumn Statement was a reform to stamp duty. Each stamp duty rate will now be paid only on the particular slice of the selling price to which it applies, not the whole value of the property as per the current system. 98% of people who buy stand to benefit. This headliner is trying to push people into selling their homes quicker, but who will buy them?
Still slowing. Both the Halifax and Nationwide are in agreement. UK average house prices are slowing, though slowing from a pretty punchy 8.2%y/y and 8.5%y/y growth, respectively. So prices continue to grow faster than incomes. And there is a chance that the recently announced reforms to stamp duty will inject a little further life into the market. But all indications remain that the UK's housing market is coming off the boil. The question is will it slow to a simmer, or start to run cold? Another boom and bust position on its way again!
Family fortunes. The typical household spent £517 a week in 2013, or just under £27,000 a year. That's less than the £28,000 they spent in 2001-02 (adjusted to 2013 prices). At £4,602, the single biggest outgoing for a typical household in 2013 was income tax. If our spending habits reflect our preferences, which they broadly should, then the hierarchy of wants in 21st century Britain runs something like this: pay for housing first, then food shopping, followed by eating out, paying the bills, filling the car, going on holiday, saving for a pension and buying new clothes. Spending on the typical mortgage fell by 4.6% between 2011 and 2013, but the average spent on rent rose by 27%. The renter / owner divide continues to grow. Are we facing a 1960`s type of issue with inflated rents for housing?
Full steam ahead. The UK is heading towards the year's end in fine fettle, according to the Purchasing Managers' Indices (PMI). Growth in service sector activity accelerated in November, the index rising from 56.2 to 58.6. Firms are hiring more people to meet demand. In manufacturing, the index increased from 53.3 to 53.5 on the back of stronger domestic demand. Export markets remain weak. Although the construction index slipped from 61.4 to 59.4, it remained firmly in growth territory. Many sectors are in decline!
Limping. In contrast, the euro area continues to struggle. Activity growth slowed last month, the PMI falling from 52.2 to 51.2. That's growth, Jim, but not as we know it. Although Germany's performance improved, France, Ireland, Italy, and Spain all weakened. Employment growth remains slow and firms' selling prices fell, which bodes ill for deflation risk. It's time to press the "QE" button at European Central Bank HQ!
The great American jobs machine. US employers created a staggering 321,000 jobs in November and the statisticians raised their estimates for the previous two months by 44,000 jobs. There are also signs that wage growth is accelerating, although nowhere near a pace that would raise concerns about inflation. With unemployment at 5.8%, down from 7% this time last year, the Fed will be watching closely to work out when to raise rates. It’s by no means a perfect guide, but the last time the US started a rate hiking cycle, in 2004, it did so when unemployment fell to 5.6%, not very far from where we are now. But this strong employment growth contrasts with the PMI surveys which suggested that growth is slowing. If they are correct, the US could be heading for its own productivity puzzle!
The story continues for the UK Government Autumn Statement 2014
An overhaul of stamp duty grabbed the headlines but fundamentally the Chancellor’s Autumn Statement was about the next chapters in two long-running sagas. First, completion of the deficit reduction journey. Second, ensuring the UK can sit amongst the best-performing developed economies. Achieving both rests to a large extent on improving productivity. There, the Chancellor looked to provide a helping hand with support to small firms and investments in roads, skills and elsewhere.
The key judgement call – wages will rise faster than prices
The Office for Budget Responsibility revised up its UK economic growth forecast again for 2014 to 3.0% from 2.7% at the time of the March Budget. Growth in 2015 remains broadly unchanged at 2.4%. But the medium-term prospects have seen a slight downgrade. Growth is expected to be 2.2% in 2016 compared with 2.6% in March and 2017 has been nudged down to 2.4% from 2.6%. Slower global growth is partly to blame. There is no forecast rebalancing toward exports.
Despite the downgrade it’s still a solid growth outlook. The OBR emphasises it rests on one key outcome: a pick-up in wage growth. Real incomes are forecast to grow strongly from next year, owing to lower inflation and higher nominal wage growth. Despite the fatter wallets households are expected to continue to take on debt. The household debt to income ratio is forecast to pass the pre-crisis peak in early 2018. In March it was forecast still to be below the peak even by 2019.
It’s a familiar message on the government’s budget deficit – eliminating it is difficult and time-consuming. It is forecast to fall by just £6.3 bn this year to £91.3 bn. That’s half the decline that was expected in March. Lower tax receipts are to blame. These have been revised down by £7.8bn in the current financial year and fully £25.3bn by 2018/19.
There are two offsets to the lower receipts to ensure that the public finances move into annual surplus by 2018/19 (as it was in March). Firstly, the departmental squeeze on spending has been tightened further from 2016/17. Second, lower government bond yields mean lower debt interest payments.
Stamp of approval
The headline grabbing announcement is a reform to stamp duty. The tax on house purchase will move from a ‘slab’ style system to a ‘tiered’ one. At the moment a house that costs £250,000 would incur a stamp duty charge of £2,500. But a house of £250,001 would incur a charge of £7,500. The reform aims to move away from this step-change system. Going forward no stamp duty will be paid on the first £125k; 2% up to £250k; 5% up to £925k; 10% up to £1.5mln and 12% above £1.5mln. Each tax rate will apply only to the particular slice of the selling price to which it applies, not the whole value of the property as per the current system. It’s estimated to benefit 98% of people who pay it.
“We must increase our productivity”
Higher wages, and thus continued solid growth, rests on an improvement in productivity. Closely related is the decline in the budget deficit. So it is no surprise therefore that the Chancellor chose to target this area. Small business, education and infrastructure are all to receive support. The doubling of Small Business Rate Relief will continue for another year and the cap on the annual increase in business rates will be kept at 2% from April 2015 to March 2016. However, the business rate system is to undergo a review. The Funding for Lending scheme has been extended for another year and it will now run to January 2016 but is now only for lending to SMEs. In terms of education, post-graduate students will be able to borrow up to £10k to fund their studies. £15bn of road infrastructure improvements for England had already been announced.
A ‘diverted profit tax’ of 25% was announced for multinationals on income generated in the UK but “artificially shifted’ abroad. Meanwhile, UK banks will see the amount of profit that can be offset by losses carried forward from the financial crisis limited to 50%. Taken together these measures are expected to generate £5bn over the next five years. Plans to grant Northern Ireland powers to set its own corporation tax were confirmed.
As for households, lower prices at the pump will continue as there will be no rise in fuel duty next year. ISAs will join pensions in being able to be passed on to spouses tax free in the event of death of a spouse. And the tax free allowance will rise to £10,600 in April (£10,500 previously).
What are your solutions to the UK finances?
The return of volatility. After a summer of calm financial markets woke up with a start last week. There were big falls on the stock exchanges around the world as markets grew more pessimistic about global growth. The pain was felt in commodity prices too, with oil now down to $75 a barrel and still falling. Weaker growth forecasts translated into delaying the expected date that interest rates start rising around the world. In response yields on bonds in the UK, US and Germany fell sharply. But not everyone moved in the same direction. Government borrowing costs spiked in Spain, Italy, Portugal and Greece. A lack of growth is a big threat to the credit-worthiness of these countries, something investors have started worrying about again. Money lending to these countries is drying up! Global growth, where is it? Trouble on the way with Russia putting pressure on Europe and world unrest!
Borrowings globally. Are we on the way back to the many financial disasters the world have experienced before? Are bankers etc leading the world to another financial crisis? Read history and it will show you the future! When will the world change its aptitude on greed?
About the Author Colin Thompson
Colin is a former successful Managing Director of Transactional/Document Manufacturing Plants, Document Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives, Non-Executive Director, Mentor - RFU Leadership Academy, Mentor - Coventry University, Mentor - The Chartered Institute of Personnel and Development, author/writer Business Advice Section for IPEX, Graphic Display World, NewsUSA, GraphicStart, many others globally, helping companies raise their `bottom-line` and `increase cash flow`. Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, business and educational models on CD-ROM/Software/PDF and over 2000 articles and 35 books published on business and educational subjects worldwide. Plus, International Speaker/Visiting University Professor.
--- --- ---
Written and submitted by:
Dr Colin Thompson
Direct: + 44 (0) 121 247 4589
Mobile: 07831 588310
Office: + 44 (0) 121 244 1802
The Cavendish Academy
--- --- ---
Global Economics Weekly Brief - UK Government