Britain's Austerity Program

8/8/2019 Britain's Austerity Program

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Britain HELL? CURSE?

GAN Hui Yu | GENG Alexander | HUANG Jieying | LEONG Edwin Chang Sheng | TAN

AusterityProgram


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11/26/10 Britains Austerity Program 2

utline ofPresentationritain s Economic Background:iscal Policy Austerity Program

: .ebate Austerity vs Stimulus?ill Britain Face a Double Dip Recession?

s Austerity the right medicine prescribed toBritain?ould there be an Austerity overdose?onetary Policy

Conclusion


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ritain s Economic Situationeading up to Austerity Program


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ritain s economic situationeading up to the AusterityProgram


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ising Public SectorDebt

ector spending plans based on these unsustainable

-r e C r is is Y ea r s i n:r i t a i n

Rapid growth in tax r&

Unsustainable profits remunerationin financial sector

Property Boom


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ising Public SectorDebt


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nsustainable levels of Privateector Debt:Household saving ratio lowest level

:Household debt %100 of

:Companies debt %110 of


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inancial Crisis

ystem has become one of the most highly leveragedn particularly vulnerable to financial instability

:it hard by the financial crisisoss of confidence and withdrawal of credit


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attern of unbalancedgrowth :1997 to 2007 Government consumption increased from %8 to :Recession Government consumption accounting for . %3 5 of

:1997 to 2007 Business investment fell from . % %1 75 to 10 : %Recession Business investment falling more than 25 to . %25


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&o overcome the fiscal economichallenges

:estoring the economy to, & -ustainable Balanced Private sector led growth

Saving Investment Enterprise


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ritain s AusterityProgramDecrease in government expenditurIncreases in individual taxes

Cuts in welfare benefits Encouraging growth in enterprise


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ndividual Taxes( ):alue Added Tax VAT

. % %,Increase main rate from 17 5 to 20 from January 20

:ayroll taxes for employees Rise by 1 percentage point from

April 2011

:nsurance Premium Tax % %Increase standard rate to 6 and higher rate to 20


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inancial Sector

:evy on banks balance sheets Intended to encourage banks to move to less risky funding p

:inancial Activities Tax Planned tax on bank profits

and remuneration


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ublic Sector

Reduction in Departmental Expenditure Limit

& -Review re approval of significant items of spending inher

A two year pay freeze for public sector workforce

%Ministry of Defense plans to cut 10 of budget over four


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Welfare

Restrictions in Tax credits policies

&Reduction in Maternity benefits Child Benefits

:Plans to remove cap in university fees May double


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Enterprise

:orporation Tax % %Sequential decrease from current 28 to 24 in 2015

:nterprise Capital Fund Introduction of fund providing additional equity finance of

:nterprise Finance Guarantee Increase to provide 200m in additional lending for SMEs


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.usterity vsStimulus


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he argument behindAusterity

-ut budget deficit to ensure long term sus Restore confidence amongst investors Support a balanced recovery


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, ,he boom not the slump is the right timeor austerityRemoving spending from the economy will

reduce levels of aggregate demand andcontract the economy

Threat of global stagnation pointed outat the G20 Toronto summit

Downward spiral might potentially hitthe economies that experience deflation

Opponent of Austerityeynesian Theory


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, ,he boom not the slump is the right timeor austerity



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Reluctance of businesses tventuallyriggered adownturn

, ,he boom not the slump is the right timeor austerity

Cut back on deficit spending



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he argument behind Stimuluseynesian TheoryWeak private demand.

Low business confidence.What can we do?

We need to maintain the total level of spending and output to rei


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:Job Creationigher employment :Multiplier Effectconomic growth

xpanded Economy - -eficit will self correct to pre recession

Government stimulus program can drive up aggregate dem

he argument behind Stimuluseynesian Theory


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roponents of Austerityeynesian Theory Mythment stimulus program can drive up aggregate demand


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ment stimulus program can drive up aggregate demandUnless country is not loaded with excessi

roponents of Austerityeynesian Theory Myth


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Multiplier effect:Economic Growth

quivalence of public andrivate spending- -icardo



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Multiplier effect:Economic Growth apan and its years of deflationary s

quivalence of public andrivate spending- -icardo



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/ /11 2 6 10 Britains Austerity Program 28

ill Britain Face a Double DipRecession?


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:ase Study Britain afterorld War IIational Debt as aercentage of GDP


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. .K GDP History


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Yield Curves

. .ield Curve for U KGilts


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ndex of Leading Indicators. .K LEI


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Asset Prices

verage House Prices. .n U K


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200 a dayverage house price drop ineptember 2010.38 06m -aily write offs of loans by&anks building societies

,567 peopleade redundant daily,21 000 >nemployed for 12 month

,000umber of new debt problemsealt with by CAB each day

,57 737verage household debt180m ersonal interest paid in UKdaily

very 14 minutesproperty is repossessed.very 3 78 minutesomeone will be declarednsolvent or bankrupt

, ,357 500 000aily increase in Government( )ational debt PSDN

nteresting Factse bt L ev el s


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Debt Levels

. .K Personal DebtLevelsTotal Secured

Lending

Total Other Consumer Credit Len

Total Credit CardLending


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/ /11 2 6 10 Britains Austerity Program 39

s Britain Facing aouble DipRecession?


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conomic Objectives ofritain s Austerity ProgramRebuild and Reinforce market confidence in British

,In the long run British government wants to restore e


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ain Debates of Austerityn Britain

stimulus or fiscal austerity be the right medicine prescribed te a a usterity overdose? Is fiscal austerity being implemented to


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ould fiscal austerity oriscal stimulus be the rightedicine prescribed toritain?.Fiscal Austerity


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ear .ed into people s mind It has been compounded from the collapse of the f

Britain has the highest amount of debt among the Group 7 nations

ould fiscal austerity oriscal stimulus be the rightedicine prescribed toritain?


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-a credible fiscal consolidation plan willrestore confidence and foster economic

recovery

d securities such that the interest rates in Britain has fallen below t



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neffectiveness of stimulus measur.a new atmosphere of frugality in Britain Fall of personal debt from $2

, .In 2009 Gordon Brown cut the VAT tax from 17 5

Japan



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Fiscal Austerity



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What is considered an austerity overd

government cuts its spending so severely that it does not signal confi

ould there be an austerityverdose? Is fiscal austerityeing implemented too severely?


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, .For now no overdose



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, .now Britain has made a painful but wise decision to apply austerity

, e short run Britain s economy may contract and there would be job losse,g run austerity may be able to bring about the desired confidence and


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ritain s MonetaryPolicy Britain s useof a monetary

policy tosoften the blow

of the

austerityprogram


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ritain s Monetary:olicy Quantitative( )asing QE


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mpact of QE on Britain set Export Ideally QE could

boost UK netexports

,In Britain s caseimpact of QE is

not very:significant

Competitivedevaluation

measures arewidely used

Exports areincreasing at a

lower rate thanimports

QE Implemented


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valuating :ffectivenessritain s MonetaryPolicy

-Britain s monetary policy has not attained its much desired results


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-hort Term Effectiveness ofritain's Fiscal andonetary Policies Fiscal consolidation

reduces AD

Low interest rateand QE aims to

increase AD butunable to offset

the decline in theGDP

:Stand AD isunlikely to improve

significantly in-the short term due

to decline inconsumer spending

AS0

AD0

AD1 AD2

Real GDP

PriceLevel


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ritain s AusterityProgram


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ritain s InflationRate CPI annual

inflation was. %3 1 in

September

Clothing andfootwear prices. %rose by 6 4

Food has thelargest upward

effect


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ritain's UnemploymentRate Highest since1992


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uture Plans to Embark:n Britain


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HE END

Britain's Austerity Program

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