British Public Affairs (JN 805)

Treasury and Economic Policy

1. Chancellor of the Exchequer 2. Economic Concepts 3. Budget Process 4. Bank of England 5. Business Innovation and Skills 6. Financial Regulatory Authorities 7. Office for Budget Responsibility 8. Stock Exchange

Lecture Outline

Chancellor of the Exchequer

Chancellor of the Exchequer after the PM most senior member of the cabinet.

Chancellor of the Exchequer – George Osborne.

No 11 Downing Street Dorneywood Treasury – Whitehall Responsibilities : overseeing government’s public

spending commitments by managing fiscal policy; managing the national debt; promoting economic growth; controlling domestic inflation and unemployment

Treasury select committee shadows the department

Chancellor of the Exchequer

Chief Secretary to the Treasury – Danny Alexander

Financial Secretary – David Gauke Exchequer Secretary – Priti Patel Economic Secretary – Andrea Leadsom Commercial Secretary – Lord Deighton

Chancellor of the Exchequer

Fiscal Policy – government use of revenue collection (taxation) and expenditure (spending).

Post war – mixed economy Thatcher years – privatisation, neo-liberalism – (economist

Milton Friedman) Monetary policy – Process by which a monetary authority

controls the supply of money, mainly through interest rate adjustments.

New Labour followed neo-liberal economic policy framework of Thatcher

Fiscal rectitude – cutting public expenditure and reducing the amount of government borrowing.

Economic Concepts

2 types of taxation – direct (income, corporation taxes) and indirect (VAT, fuel duty).

Progressive Income tax system Regressive basis of Indirect taxes Corporation tax paid by companies on profits Capital Gains Tax (CGT) paid by the owners of

financial assets such as property Inheritance Tax – death duties

Economic Concepts

Neo-liberalism is a political and ideological project broadly defined by:  A confidence in the market as efficient mechanism for

allocation of scarce resources;  A belief in global regime of free trade and capital mobility; The creation of independent national reserve banks and

tight control of money supply through interest rates; A belief in limiting role of the State to facilitating market

mechanisms; A belief in labour-market flexibility, removal of welfare

benefits, and use of private finance in public projects.

Economic Concepts

Economic Concepts

Privatisation – selling government assets, such as Royal Mail.

Public-private partnerships

Nationalisation – government owned

Balance of Trade – difference in value between the total of all goods and services bought by British residents from overseas (imports) and all UK-made products sold abroad each year. £3.2 billion in Nov 13.

Balance of payments – difference in value between the total of all payments of every kind flowing between the UK and other countries, including financial transfers and debt payments to foreigners.

Economic Concepts

Gross domestic product (GDP) – market value of total output of goods and services produced within Britain each year irrespective of national ownership.

http://www.theguardian.com/business/2015/jan/27/uk-gdp-slows-final-quarter

Gross National Product (GNP) market value of all goods and services produced by British-owned companies, labour, and property each year irrespective of location around world.

Economic Concepts

The national deficit – the annual difference between government spending and its receipts (mainly taxation) – government has to borrow to make up the difference. Annual budget deficit about £105 billion in 2013/14.

The national debt the accumulation of these annual deficits and the borrowing incurred to make up the difference. About £1.45 trillion.

Borrowing occurs through the public sector net cash requirement .

Economic Concepts

Inflation – rise in price levels which reduces purchasing power. Inflation measured by consumer price index (CPI) and retail

price index (RPI). CPI excludes housing costs and mortgage rates. Current inflation rate (measured by CPI) is 0.5%.

http://www.theguardian.com/business/2015/jan/13/uk-inflation-falls-14-year-low-half-a-percent

Bank of England inflation target rate of 2%. If more than 3% or less than 1% then Governor of the Bank of England has to write letter to the Chancellor saying why target of 2% has not been met and what will be done.

Fear of stagflation – combination of high price inflation, high unemployment and low economic growth

Economic Concepts

Budget Process

Highlight of the Chancellor and the government’s year the Budget and the accompany Finance Act

18 March budget Comprehensive

Spending Reviews (CSR) http://www.theguardian.

com/politics/2013/jun/26/comprehensive-spending-review-need-know

Budget speech designed to forecast short to medium term movements in the economy 1-3 years

Announces new taxes, tax breaks, and or benefits to finance investment

Other measures of help to low paid, the elderly etc likely to be in short supply in the age of austerity

Budget Process

Finance Bill speaker designates it a ‘money Bill’ Budget is fast tracked through Parliament Speech regarded as first reading Scrutiny at committee stage Lords can’t interfere Leader of the Opposition responds (difficult

Parliamentary occasion as there are likely to be surprises)

Debate on the floor of the Commons

Budget Process

New Labour gave independence to the Bank of England in the first few weeks following their landslide first victory (1997)

Established Monetary Policy Committee chaired by Governor of the Bank (Mark Carney current Governor of BofE)

Responsibility to set interest rates. Takes the decision out of the political arena

New Labour set up regulation system Financial Services Association (FSA) (widely accused now to have failed when it came to the global banking crisis – new coalition government abolished it)

Bank of England

Bank of England

Interest rates set by Bank’s governor and the monetary policy committee

Quantitative Easing – The BofE responded to global financial crash by pumping liquidity into system (increasing supply of money) to encourage more lending.

http://www.bbc.co.uk/news/business-15198789

Bank of England

Current unemployment rate is 5.8%. Annual wages increased by average of 1.8%

in year to November 2014. http://www.theguardian.com/business/2015/j

an/21/uk-unemployment-falls-hiring-spree-stalls

Bank of England

Vince Cable - Secretary of State for Business, Innovation and Skills and President of the Board of Trade

BIS promotes trade, invests in skills and education, oversees consumer law and business regulation.

BIS includes Greg Clark, Minister of State for Universities, Science and Cities

BIS select committee shadows department

Business Innovation and Skills (BIS)

Competition and Markets Authority (created out of merged Office of Fair Trading and Competition Commission – part of BIS, started April 2014)

https://www.gov.uk/government/organisations/competition-and-markets-authority

Business Innovation and Skills (BIS)

Financial Conduct Authority – polices the conduct of every financial company (not part of Bank of England). http://www.fca.org.uk

Prudential Regulatory Authority – subsidiary of Bank of England – prevents financial companies from taking imprudent risks. http://www.bankofengland.co.uk/PRA/Pages/default.aspx#

Financial Policy Committee – within Bank of England – charged with identifying potential financial and macroeconomic risks to the stability of the UK economy. http://www.bankofengland.co.uk/financialstability/pages/fpc/default.aspx

Financial Regulatory Authorities

The Office for Budget Responsibility (OBR) was formed in May 2010 to make an independent assessment of the public finances and the economy for each Budget and Pre-Budget Report.

http://budgetresponsibility.org.uk

Office for Budget Responsibility

Shares in public limited companies (plc) traded on global stock market – one of the biggest London Stock Exchange

Limited liability companies (ltds) – small and medium-sized enterprises (SMEs), liability limited to nominal sum. Includes theatres, charities and voluntary trusts

Private Limited companies – Also SMEs, shares not publicly listed, liability limited to values of shares initially issued

Public Limited Companies (plcs) – floated and listed on the LSE

Stock Exchange

FTSE (Financial Times Stock Exchange) Indexes track company share prices. Leading index is the FT100 Share Index (now about 6,749 pts). The FT All-Share Index lists all stock market companies.

http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/indices/summary/summary-indices.html?index=UKX

Stock Exchange