Entries Tagged 'uk economy' ↓

The UK national debt is the total amount of money the British government owes the private sector.

At the end of August 2008, UK National debt was £637.4 billion. (or 43% of National GDP) - Source: Office National Statistics [1]

Graph Showing UK National Debt

National debt UK

National Debt as a % of GDP has increased from 30% in 2002 to 36 % in 2007. This was despite the long period of economic expansion. It is primarily due to the governments decision to increase spending on health and education. There has also been a marked rise in social security spending.

National Debt has increased sharply in the past 12 months because of:

• Slowing Economy (lower tax receipts, higher spending on unemployment benefits)
• Financial bailout of Northern Rock and other banks.

Although 43% of GDP is alot it is worth bearing in mind, that other countries have a much bigger problem. Japan for example have a National debt of 194%, Italy is over 100%.  The US national debt is close to 68% of GDP. [See other countries Debt] . Also the UK has had much higher National debt e.g. after second world war is was over 150% of GDP.

National Debt and Financial Bailout

(updated)

The Nationalisation of Bradford & Bingley and Government purchase of shares in major banks like HBOS will cause even more borrowing. It is estimated National debt will rise to 45% of National Debt by April 2009

It is way above the government’s sustainable investment rule of 40% maximum. However, the debt is  different in the sense that the government has a good chance of getting its money back. It is different to say borrowing to pay pensions.

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Readers Question:

1. critically examine the effectiveness of monetary policy.

2. what factors do you think limit the effectiveness of monetary policy.

Previously, I have written an essay - what determines the effectiveness of monetary policy

In brief, the aim of monetary policy is to target low inflation (CPI = 2% +/-1). But, also to maintain a steady rate of economic growth. In recent months it has been difficult for the Bank of England to achieve both these objectives. This is because we have had cost push inflation (rising oil, food prices). The cost push inflation causes rising prices and falling economic growth. Therefore, even though inflation has increased to over 4%, the Bank don’t want to increase interest rates because the economy is already slowing down. Therefore, they have left interest rates the same and have been unable to keep inflation on target.

However, in period 1997-2007, monetary policy effectively kept economic growth and inflation stable. This was because cost push inflation was low and the independent Bank of England was successful in preventing growth exceeding the long run trend rate.

Readers Question I’m currently looking at stagflation in the mid 1970s in the UK, and the policies the then-Government undertook to solve the economic crisis.

Was the Government right to widen the budget deficit 1974-5 in order to stimulate demand, or should it have run less expansionary policies to temper the effect of rising prices?

I’m afraid I don’t have access to many statistics from the 1970s, so it is hard to make much analysis. But basically, the government faced a twin problem of rising prices (mainly cost push) and falling demand. (Stagflation) By pursuing expansionary fiscal policy, they were attempting to maintain full employment ( a noble objective). However, it led to a rise in inflation and inflation expectations. Combined with powerful trades unions in the 1970s, this led to a sharp rise in inflation (25% by 1979). Arguably these rates of inflation were costly for the economy and led to an almost inevitable recession in 1980. see: recession 1980-81

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There are signs that the long period of economic growth may soon be ending.

For a long time the UK economy has been bolstered by rising house prices and strong demand from the consumer. However, a series of very disappointing results on the high street suggest that consumer confidence has fallen significantly in the wake of rising living costs and falling house prices.

A full blown recession (negative economic growth) has yet to materialise, but, the signs are for a sharp slowdown.

The data will be of little comfort to the government (facing a record level of government debt - £60billion)

it will also be of little comfort to the MPC, who have to balance the twin problems of inflation and lower growth

• Is UK Heading towards recession?
• Business chiefs and Economists give their opinion at Telegraph

Readers Question: explain why two sectors of the UK economy are growing faster than other sectors ?

According to the Office of National Statistics for March 2008

• Retail Sales Volume Seasonally Adjusted (2000=100) increased to 140.3 an annual growth rate of 4.7%
• Manufacturing grew at only 0.9%
• Services grew at 3.2%

latest statistics at ONS

I have to admit I was a little surprised to see retail sales increase at 4.7%. Anyway it seems that retail sales and the service sector are still doing much better than manufacturing and production. These are some potential reasons.

Exchange Rate. Against the dollar, at least, the Pound has been strong. This makes our exports more expensive reducing demand. Manufacturing goods are often exported so would explain weakness of manufacturing sector. Imported goods become cheaper so may boost sales on the high street.

• However, the pound has been weak against the Euro, our main trading partner, so I doubt how important this factor is.

Interest rates. The Bank of England has cut interest rates to 5%. In theory this should boost spending because it makes borrowing cheaper. This would explain increased retail sales and services because consumers will have more spending power.

• However, the cuts in base rates have often not been passed on by banks. The credit crisis has led to a tightening of lending restrictions. This is why I was a little surprised to see retail sales growing so strongly.

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Readers Question: How does the UK’s economy compare to other European countries such as France in terms of the UK’s seeming reliance on House Prices and consumer confidence to drive the economy. Is there a better way and why don’t we use it.

I was interested in making a comparison between the UK and French economy. and wrote an Essay on The French vs UK Economy.

Generally speaking, most economists argue that the UK economy has performed  better than the French economy in recent years. However, you are right to suggest that the UK economy has relied to a large extent on consumer spending, driven by rising house prices. Arguably this growth has been unbalanced and if house prices fall significantly it will lead to lower growth in the UK and in the future, the situation could be reversed.

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Readers Question: During 1995 - 1997 in the UK, mortgage equity withdrawal was negative. What does a negative mew value show? and why was there a negative value during this period in the UK?

Mortgage equity withdrawal occurs when people borrow money against the value of their house.
A common way to withdraw equity is to remortgage your house. This is especially common when house prices are rising because the house is worth more than the initial mortgage. Mortgage equity withdrawal is thus a way to increase borrowing secured against your rising house value.

Net Mortgage Equity Withdrawal is a way to measure the total amount that people borrow against their house, but, don’t use to invest in housing. i.e. people remortgaging to buy a car e.t.c

However, in addition to withdrawing your equity through remortgaging. Consumers also inject money through buying houses and improving the condition of existing houses.

A negative value of MEW means that the value of housing stock is increasing faster than the amount of equity taken out by homeowners.

In 1995, we see the following statistics:

(A) Withdrawal by Mortgages £ million 11,519
(B) Other Equity Withdrawals £ million 17,434

(C) Equity Injected through House Purchase £ million 11,721
(D) Financial Equity Injected £ million 13,045
(E) Dwelling Improvement Investment £ million 10,573

(F) Net Equity Withdrawal £ million -6,386
Source Council of Mortgage Lenders CML pdf
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The banking system in the UK is highly concentrated with the top 10 banks having over 90% of market share.

In recent years, the advent of internet banking has provided a new source of income, but, at the moment the banking system is still dominated by these top 10 banks.

Note: Recent merger of HBOS and Lloyds TSB

This is a rough guide to the biggest 10 British banks.

Some interesting facts about British banks.

• They employ 0.5million people Continue reading →

A.Darling’s first budget is good news for those who don’t drink, smoke or buy SUVs.
No major changes, but these are some of the main features of the budget.

• Cigarettes up 11p a packet of 20.
• Beer up by 4p a pint, wine 14p a bottle, spirits 55p a bottle.
• Duties on alcohol will go up by 2% above inflation for next four years.
• related: Should tax on alcohol rise?

Cars and Petrol

• From 2009, major reform of the vehicle excise duty. For new cars from 2010, the lowest-polluting cars will pay no road tax in the first year. Higher-polluting cars will pay more.

• Funding set aside for road-pricing proposals. (road pricing in UK)

• 2p increase in fuel duty is postponed for 6 months due to high price of oil

• For environmental reasons, fuel duty will rise by 0.5p per litre in real terms in 2010. This is said to be for green reasons, but, is very small % of price.

Housing

• From April, key workers, such as teachers and nurses, will be able to borrow money from shared equity schemes.

• Stamp duty on shared ownership homes will not be required until people own 80% of their home.

• More people should have the chance to have a long-term fixed mortgage, which a report shows can reduce the risks for first-time buyers and can keep them on the housing ladder. (but, not clear whether people will actually take them out)

• Sites for 70,000 more houses have been identified. (But, when they will be built is another matter)

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There is an interesting opinion poll in today’s Times. It shows people’s response to different questions about state of the UK economy.

The report is giving importance to the anecdotal evidence of consumers, such as - Are you spending more on clothes than this time last year.

In this article. - Statistics and Outlook for UK economy, I Looked at the merit and limitations of using opinion polls such as this.

One thing for certain is that in tomorrow’s budget these results are unlikely to be used by the Chancellor. He will spend time referring to the official statistics, which paint a much more positive outlook for the UK economy.

Given the high levels of consumer debt in the UK, this consumer pessimism is likely to cause a significant downturn in spending and economic growth.

Do you agree with the gloomy outlook painted in these opinion polls?