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Plan A UK and Plan B in Cyprus - Economics Weekly

Global Economics Weekly Brief

Plan A UK and Plan B in Cyprus

George Osborne reaffirmed his commitment to Plan A in the Budget last week. Despite an eye-catching proposal to boost the housing market, and a promise of lower corporate taxes, this was yet another fiscally neutral set of policy changes. As for the economic outlook, the UK’s fiscal watchdog expects weaker growth and higher borrowing. Meanwhile, crisis-hit Cyprus became the fourth country to receive a bail-out. Read comprehensive details on the UK Budget below.


"Today, I'm going to level with people". Following these words, the Chancellor delivered his 2013 Budget. George Osborne presented a forecast for the economy that included higher borrowing and much higher debt than previously anticipated. Net debt relative to the size of the economy is now expected to peak at over 85% in 2016/17 and an extra £56bn will be borrowed over the next five years. However, the Office for Budget Responsibility (OBR) still thinks there is a better than 50% chance of the Chancellor hitting his fiscal mandate of balancing the (business cycle adjusted) budget in five years time. Challenging times ahead for at least 10 years!

OBR slashes 2013 growth forecast but thinks the damage is largely temporary. In the three months since December's Autumn Statement the OBR has halved its forecast for 2013 GDP growth. It now expects the UK to grow by just 0.6% this year, down from 1.2% in December. But the fiscal watchdog did at least make the pill a bit easier to swallow: it only reduced its estimate of "potential output" by a little over 0.1%. This is a technical way of saying it expects the UK economy to recover the ground it has lost someday, rather than it being gone forever. Tough times for any growth! There is a global issue on growth with many countries!

Big housing market push. Among the policy changes offered, a new guarantee scheme for mortgage lending grabbed most headlines. It will enable those without a 20% deposit to take out a mortgage and buy a house. This is a big programme by any measure. The scheme has the potential to back £130bn worth of lending, which is worth more than 10% of outstanding mortgage debt. Who wishes to buy a new house with deposits at 20/25% with house prices in many areas with `negative equity`! This UK system is the same as previous systems with very little `take-up`!

Chancellor announces a new Bank of England mandate. Not only will the Bank have a new Governor we will also have an amended mandate for monetary policy to allow “forward guidance”. At present, the Bank tells us each month what interest rates will be for the next few weeks, but it will now be given scope to behave more like the US Federal Reserve. The Fed currently says it will keep rates low as long as US unemployment is above 6.5% and inflation is under control. The idea is that this forward guidance will convince people and businesses that interest rates will stay low for a long time, giving them incentives to borrow and spend. Inflation is on the rise so what about interest rates in the future? They will rise also!

Inflation and employment up, despite a shrinking UK economy. CPI inflation edged up 0.1% to 2.8%y/y in February as higher utility and petrol bills pushed up the cost of living. Meanwhile, 131k jobs were added to the economy between November and January, despite a 0.3% contraction in GDP in Q4. But once again, wages failed to keep up with the rate of inflation, rising only 1.2% on a year earlier. The squeeze on household budgets continues.

Plan-B in Cyprus - A deal for Cyprus, as the Eurozone crisis rumbles on. Details are emerging of a new bailout deal for Cyprus. The country’s two biggest banks will be restructured to raise the funds needed to secure a loan from the “Troika”. Depositors with less than €100,000 in those banks will be protected, it seems, but any amounts over and above that figure could potentially be wiped out. A solution where “small” depositors don’t lose out should be better for stability in the Eurozone’s banking system, but how much damage has already been done? The Eurozone continues with massive challenges for now and in the future to survive!

The Eurozone’s contraction gathers pace, but US and China more encouraging. The Purchasing Managers’ Index (PMI) for the Eurozone continues to drop at an alarming pace. The composite index for manufacturing and services hit 46.5 in March from an already-depressed 47.9 in February (anything below 50 signals contraction). Weakness is spread across the Eurozone but France was the most disappointing, with output contracting at its fastest rate since March 2009. This was the so-called “flash” estimate of the survey; the final version could be even worse, as events in Cyprus hit sentiment. More encouragingly, the good news continues to come from the US, where manufacturers have clearly gained momentum this year. The flash reading of China's manufacturing PMI rose slightly more than expected, reversing most of February's decline. All told, the Chinese economy appears to be growing at a slightly quicker pace than in Q4. The global growth is slowing rapidly!

UK Budget

“Today, I’m going to level with people”

The Chancellor is nothing if not persistent. Standing before the House of Commons, George Osborne once again reaffirmed his commitment to Plan A. As in the Autumn Statement and the previous Budget, the measures announced today, alongside previously announced measures, have combined to produce another fiscally neutral set of policy changes. Beyond this, the Chancellor announced a new mandate for the Bank of England and some new spending designed to support those looking to buy a house and boost the supply side of the economy.

“It is taking longer than anyone hoped”

The Office for Budget Responsibility downgraded its forecasts for growth, citing a combination of weaker than expected prospects for both domestic and external demand. The forecast for 2013 was halved from 1.2% back in December to 0.6% today. Back in 2010, the OBR was hoping for growth in 2013 of 2.9%. Growth is expected to exceed 2.3%, what the OBR thinks is the UK’s “trend” rate of growth, only from 2015 onwards.

Net debt relative to the size of the economy is now expected to peak in 2016/17, a further one year later than was expected as recently as December. The new peak is expected to be 85.6%, which is 15 percentage points above what was expected in 2010. While the supplementary target has now well and truly been missed, the OBR thinks that the target of balancing the budget (adjusting for the business cycle) within the next five years is more likely than not to be hit.

“So I am setting out today an updated remit for the Monetary Policy Committee”

At present, the Bank of England tells us each month what interest rates will be for the next few weeks, never giving a clue as to what it is thinking of doing over the longer term. But it will now be given scope to behave more like the US Federal Reserve. The Fed currently says it will keep rates low as long as US unemployment is above 6.5% and inflation is under control. That gives Americans a clear steer about when it will raise rates. The idea is that this forward guidance will convince people and businesses that interest rates will stay low for a long time, giving them incentives to borrow and spend. The MPC will give its assessment of the pros and cons of this tool in Augusts' Inflation Report.

“A new offer to the aspiration nation”

The Chancellor’s supply side policy changes included £3bn of new infrastructure spending, a further reduction of the headline rate of corporation tax to 20% as of 2014 and the introduction of a £2,000 Employment Allowance to create more room for small businesses to increase hiring. He also announced proposals for the UK’s planning system and regulatory environment, although we will have to await the summer for details.

Households were also the subject of Mr. Osborne’s “aspirational” policy changes, with the announcement of a loan guarantee scheme for eligible new mortgages. This will be paid for by fees charged to lenders in such a way that they compensate the Government for expected losses, the cost of capital and administrative costs. The First Buy scheme, whereby the Government provides an equity loan on up to 20% of the value of a new build house, was also extended. The Chancellor also announced a milestone for the personal tax allowance, which will rise to £10,000 as of 2014. The increase in fuel duty that was planned for September has now been scrapped. While the Government’s policy changes since 2010 have hit the top 10% of earners the hardest, the Treasury estimates that the bottom 10% of earners have been hit almost as hard. he only earners that have benefitted from Austerity thus far have been in the “upper middle income” brackets.

George Osborne presented his Budget on Wednesday 20 March 2013.
In his opening statement he set the scene for some of the new measures announced, stating 'this is a Budget for people who aspire to work hard and get on'.
Towards the end of last year the Government issued the majority of the clauses, in draft, of Finance Bill 2013 together with updates on consultations. The publication of the draft Finance Bill clauses is now an established way in which tax policy is developed, communicated and legislated.
The Budget updates some of these previous announcements and also proposes further measures. Some of these changes apply from April 2013 and some take effect at a later date, so the timing needs to be carefully considered.
Our summary (see below) focuses on the issues likely to affect you, your family and your business. To help you decipher what was said we have included our own comments. If you have any questions please do not hesitate to contact us for advice.
Main Budget tax proposals
Ø Date set for increase in the personal allowance to £10,000.
Ø New scheme for tax free childcare.
Ø Further reduction in the main rate of corporation tax to 20% from 1 April 2015.
Ø Employee-shareholder contracts will be exempt from income tax and NIC for the first £2,000 of shares received.
Ø The introduction of an allowance of £2,000 per year for all businesses and charities to be offset against their employer Class 1 NIC liability from April 2014.
Ø A capital gains tax re-investment relief for gains made in the tax year 2013/14 where the gain is invested in Seed Enterprise Investment Scheme shares.
Significant non-tax measures have been announced to tackle long-term problems in the housing market and are covered in our summary.
Previous announcements
Some of the changes detailed in this summary have been the subject of earlier announcements. Here is a reminder of some of the more important ones:
Ø personal allowance substantially increased for 2013/14
Ø restrictions in the higher age related personal allowances and their availability
Ø an increase in the Annual Investment Allowance limit from £25,000 to £250,000
Ø introduction of a cash basis for reporting profit for the smaller unincorporated business.
You can find an accurate and reader-friendly summary covering all key subjects and changes from the Chancellor's Budget Speech by clicking on this link below:

IFA 2013 Budget Summary

In addition, you can find information relating to UK HMRC by clicking on this link:

http://www.hmrc.gov.uk/budget2013/


Global Economic Crisis

The Market Sentiment Globally
The current financial crisis is the worst the world has seen since the Great Depression of the 1930s. For younger generations, accustomed to mild recessions of the new phase of globalization, the misery of the Great Depression is hitherto nothing more than a distant legend. However, the collapse of two Bear Stearns Hedge funds in summer of 2007 exposed what came to be known as the subprime mortgage crisis, reintroducing the world to an era of bank failures, a credit crunch, private defaults and massive layoffs. In the new, globalized world of closely interdependent economies, the crisis affected almost every part of the world, receiving extensive coverage in the international media. “In an Interconnected World, American Homeowner Woes Can Be Felt from Beijing to Rio de Janeiro,” observed the International Herald Tribune at the onset of the crisis. “Chinese Steelmakers Shiver, Indian Miners Catch Flu,” noted the Hindustan Times. “US and China Must Tame Imbalances Together,” suggested Yale Global, as the frenzied search for a solution continues around the globe. Global greed to expand at any cost is the major issue.

In this special report, Yale Global offers essential information on why the crisis started, how it affected the industries and consumers around the world, and what solutions have been proposed by experts and regulators across countries. Click on each title below for comprehensive information.

Causes of the Crisis
What exactly caused the crash


Evolution, Effects and Response
The worst crisis since the Great Depression


Global Solutions
Solutions for the future
World Economic Outlook (WEO)
Coping with High Debt and Sluggish Growth - http://www.imf.org/external/pubs/ft/weo/2012/02/pdf/text.pdf
The World Economic Outlook (WEO) assesses the prospects for the global recovery in light of such risks as the ongoing euro area crisis and the "fiscal cliff" facing U.S. policymakers. Reducing the risks to the medium-term outlook implies reducing public debt in the major advanced economies, and Chapter 3 explores 100 years of history of dealing with public debt overhangs. In emerging market and developing economies, activity has been slowed by policy tightening in response to capacity constraints, weaker demand from advanced economies, and country-specific factors, but policy improvements have raised these economies' resilience to shocks, an issue explored in depth in Chapter 4.
Plus, the `Global Risks 2013 Report - Risk Cases and Resilience` - contact us today....
Global economic outlook for 2013 revealed - United Nations ...
http://www.un.org/en/development/desa/news/policy/wesp2013.html


10-Step Double-Dip Recession Survival Guide for Entrepreneurs - click on the connection below for comprehensive information.
http://newsusa.myfeedportal.com/i/double-dip-recession-survival-guide

What do you think about this?


Read more newly added articles, which you can add to, on NewsUSA-MyFeedPortal: http://newsusa.myfeedportal.com/i/libor-scandal <--- The Largest Scandal The World has Ever Seen - The LIBOR Scandal.


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Plan A UK and Plan B in Cyprus

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