Fighting economic crisis in U.K.

Current economic difficulties in U.K. were caused by global financial crises and have resulted into the following changes in the country's economy in 2007-2008:

- GDP growth contraction;

- Negative growth of output from contraction in services, construction and industrial output;

- Weakening of share prices and pound depreciation at financial markets;

- Contraction of consumers' spending;

- Continued weakening of business investment;

- Strengthening of government expenditure, deterioration of public sector finances;

- Widening of current account deficit and goods deficit;

- Buoyancy of labour market activity, subdued growth of average earnings;

- Buoyancy of producer output prices, increase of input prices; fall of consumer prices, though they still stay above target.

If we look back at U.K. economy at the period since the turn of the Millennium, it does not look like a classic economic boom – inflation has stayed close to the government target. Economic growth has been stable and robust, but at a level which is not exceptional by post-war standards.

But beneath this benign picture — also referred to as the Great Stability — some imbalances were accumulating, the consequences of which have become increasingly evident in recent months. The first of these imbalances has been the growth of household indebtedness with the concomitant rise in house prices. As a result a sharp contraction in credit availability accompanied by a fall in house prices is now observed in U.K. It is unlikely that terms of access to mortgage credit will move back to where it was in early 2007 for some time, if ever. Another significant imbalance has been in terms of the balance of payments.

Since around 1999, the U.K. has been running a significant current account deficit. Such deficit is sustainable only as long as the U.K. is able to sell assets to the rest of the world. And over this period, the U.K. has been a beneficiary of capital inflows in significant measure from the emerging market economies. It is this capital account surplus which links the current account deficit to developments in the housing market.

The household savings rate in the U.K. has been low and falling. In this context, the U.K. was able to benefit from overseas finance to support our housing market by selling mortgage-backed securities to investors abroad, supporting rapid growth in RMBS issuance. The unwinding of this imbalance is part of the reason why sterling has been weak in the period since August 2007. The continued weakness in Sterling will tend to push up on inflation as it passes through the economy. Part of the reason why inflation has risen so sharply in the past year has been import price inflation currently running at 11,4%, the highest level since 1985. Sterling weakness will also lead to a further squeeze in real living standards as U.K. consumers will, in the end, have to pay more for imported goods.

The government of U.K. has set out its actions for overcoming the difficult times of the current global financial crisis starting with recapitalizing banks so they can resume lending to families and businesses, and better international co-ordination of fiscal and monetary policy. Another government measures will be the following:

1. Basic rate taxpayers will pay £145 less tax a year in 2009-2010; employee, employer and self-employed rates of National Insurance Contributions will increase by 0,5% from April 2011; the Income Tax personal allowance will be restricted to half its value for those with incomes over £100,000 from April 2010; a new, higher rate of Income Tax of 45% will be introduced for incomes above £150,000.

2. The Value Added Tax (VAT) rate will be temporarily reduced to 15% from 1 December 2008 until 31 December 2009.

3. Fuel prices will increase starting 1 December 2008, main fuel duties will increase by 1,84 pence per litre on 1 April 2009 and 0,5 pence per litre above indexation on 1 April 2010, new vehicle excise duty bands will be introduced in 2009. Yet, there will be no significant rate changes until 2010, and no driver in any given band will pay over £30 more in that year.

4. New benefits and tax credits will provide additional support for low- and middle-income taxpayers.

5. Green measures will be introduced such as green stimulus, including aviation in the EU Emissions Trading Scheme from 2012, increase of price for fuel, installation 600,000 insulation measures this winter, reform of air passenger duty from 1 November 2009.

6. The government will increase its Value for Money target in 2010-2011 by £5 billion. As part of the government's fiscal stimulus package, £3 billion of capital spending will be brought forward from 2010-2011 into 2009-2010 and 2008-09. Current spending will grow on average from 2011-2012 to 2013-2014 at 1.2 per cent a year in real terms, and public sector net investment will move to 1.8 per cent of GDP by 2013-2014.

The U.K. government also emphasizes the necessity of immediate action to stop the spread of the financial crisis to middle-income countries, with a new facility for the IMF, and agreement on a global trade deal, as well as reform of the global financial system.

Source: BanksDaily.com
Date: 27.07.2009 [228]