The Chancellor of the Exchequers Budget Statement Claim - Assignment Example

THE BUSINESS ENVIRONMENT The Significant parameters, interalias, on which a indication of the Economic Growth of a country can be assessed are as follows: 1. Rise in GDP Index. 2. Reduction of unemployment Levels. 3. Consumer Expenditure. 4. Increase in Investments. 5. Decrease in Retail Price Index. 6. Decrease in Producer Price Index. 7. Balance of Payment. 8. Balance of Trade In the present context of the Chancellor of the Exchequer’s Budget Statement Claim that Great Britain is entering “the tenth year consecutive year of uninterrupted economic growth” I propose to deal with the subject along the abovementioned lines: Rise in GDP Index: The GDP is a significant index of the UK economic health and provides for a measure of the total economic activity in the Region Growth in the 3rd Quarter of 2006 is driven by rise of 0.8 % in the Service Sector with the strongest growth in the business and service industries. As is evident from the graph attached (see annexure I), there is no conspicuous growth in the GDP since 2001, and thus the claim of the Chancellor is contradicted. The Annual Growth for UK GDP was 3.8 % in 1999. In The ‘UK GDP’ Published Accounts (Chained Volume Measure £1million) presented for the 3rd Quarter of 2006, published on 21.12.2006, the Overall GDP stood at £301.1 million, signifying a 0.7change since the last Quarter and 2.9 since the last year. (http://www/statistics.gov.uk./CCI/nscl.asp?ID=5900). The office of National Statistics revealed that UK GDP during the period grew by 0.4% from the previous quarter and 2.1% on a year-on-year basis. Both were downward revisions from rises of 0.5% and 2.7% respectively (http://www.forbes.com/markets/feeds/afx/2005/06/30/afx2117553.html). Whether this change of 2.9 measures to a “strong and strengthening” proponent, as ascribed by the Chancellor of the Exchequer, is a contentious issue. Reduction in Unemployment/Underemployment Levels: Employment rates have changed in these years and some sectors reported an increase in employment while other sectors show a fall in the number of employment opportunities. In the context of the Labour Market, the employment rate was 74.5% and the unemployment rate was 5.5%. “The number of unemployed people increased by 197,000 over the year to reach 1.70 Million” (http: www/statistics.gov.uk./CCI/nscl.asp? ID=5900 2006). Thus we find that the UK government has not been able to exactly control unemployment, which is a significant indicator of economic growth since increase of job opportunities leads to higher earnings and consequently, more money in circulation. Increase in Consumer Expenditure: Consumer expenditure accounts for 2/3 of total UK’s domestic expenditure. The government expenditure reported an increase in this year’s expenditure and continues to rise at a steady rate of 0.7% in the 1st quarter of the previous year. As the Keynesian Theory has propounded, “if free market forces are not capable of regulating the level of economic activity, there is a clear case for state intervention” (Nellis, Parker. 1996). Increase in Investment: In recent years, following the abolition of exchange controls in 1979, there has been an increasing flow of FDI into and out of the UK. Many foreign firms have set up Production plants in the UK whilst UK firms have expanded their operations overseas and become multinational (www.tutor2u.net). Decrease in Retail Price: In UK the two main measures of inflation are Consumer Price Index (CPI) and Retail Price Index (RPI). The CPI or RPI for a given year compares the cost of purchases of the typical household in that year with the cost in the year. This series is sometimes referred to as the "Cost-of-Living Index" and officially as the Retail Price Index. The government inflation target is based on the CPI. The bank of England Monitory Policy Committee sets interest rates to meet this target. The RPI is the most popular measure of inflation. Tax allowances, state benefits, pensions and many other payments are often revise in tandem with this index. (http://www3.hants.gov.uk/finance/retailpricesindexandconsumerpriceinex.htm) “ONS estimates that changes to duties in the March 2006 Budget will add 0.13 percentage points to the 1-month change in the Consumer Prices Index (CPI), if duty changes are passed on in full to consumers. For the Retail Prices Index, it is estimated that this years Budget will add 0.15 percentage points to the 1-month change; this compares with an increase of 0.09 percentage points from the 2005 Budget. Overall, the net effect of the two most recent Budgets on the RPI annual inflation rate is estimated to be +0.06 percentage points” (http://www.statistics.gov.uk/CCI/nscl.asp? ID=5900) From the above it is evident that the CPI is showing an upward trend, which would result in lower consumption and reduced circulation and fall in aggregate demand for goods and services. This is inconsistent with the characteristics of a strong and sound economy. Producers’ Price Index: “The Producer Price Index (PPI) is a monthly survey that measures the price changes of goods bought and sold by UK manufacturers and it provides a key measure of inflation, alongside other indicators such as the Retail Price Index (RPI) and Corporate Services Price Index (CSPI)”. (http://www.statistics.gov.uk/CCI/nscl.asp? ID=5900) “The current account deficit widened to £9.4 billion in the third quarter, from a revised deficit of £8.3 billion in the second quarter. This is equivalent to -2.9 percent of GDP. Balance OF Payment: The income balance fell from an £8.8 billion surplus in the second quarter to a surplus of £6.6 billion in the third quarter, mainly due to higher foreign earnings on direct investment in the UK. The deficit on goods and services narrowed to £13.3 billion from £14.3 billion in the previous quarter, mostly due to a lower deficit on finished manufactured goods. The UK recorded a net international investment liability position of £237.5 billion in the third quarter” (http://www.statistics.gov.uk/CCI/nscl.asp?ID=5900). From the above it is evident that the words of the Chancellor of the Exchequer remains unsubstantiated as far as UK balance of payment position is concerned. Instead of the steady growth of BOP, it has actually dropped by 2.2 billion in the third quarter diagram (See Annexure-II). Balance of Trade: In the fiscal year 1995, the BOP value stood at £801314 while in the fiscal year 2005 the same stood at £1297326 thus registering an overall increase of 38% over the last ten years and an average of around 4% growth every year. This is a fairly good indication of UK foreign trade position during the period under review. Conclusion: From the above deliberations it is observed that the British economy has proved its resilience and mettle but has not been able to provide upward thrust in all major areas of public accountability. It has not been able to contain unemployment, was unsuccessful to curb the inflationary pressures in its economy and also allowed the price indices to rise. However, it presents a healthy growth in exports although the position of Balance of Payment needs to be further improved to capitalise on emerging trends of international business procedures brought about by E-commerce and its resultant benefit to developed economies like the UK. This is especially so because e-commerce forms the backbone of global industrial activities and practices in the present time. Potential Impact on UK economy of sharp fall in house prices in the US: The Income-Expenditure model as propounded by J. M. Keynes, universally acknowledged as the Keynesian Theory advocates the changes in any of the injections into, or, withdrawals /leakages from the circular flow of income will bring about a change in the level of National Income. INJECTIONS: 1. Investments spending 2. Government spending 3. Export revenues. WITHDRAWALS: 1. Taxation 2. Savings 3. Import Expenditure The diagram referred in Annexure III studies the impact of increase in Govt. expenditure on demand. Aggregate demand would increase as shown in the Figure in Annexure III. The increase in G is depicted as vertical movement in aggregate demand from AD1 to AD2. Therefore, an initial increase in Govt. expenditure has given rise to a new equilibrium level of National Income (Ye).It is important to notice, however, that the initial increase in Govt. Expenditure is less than the consequent increase in National Income. This is a fundamental point of Keynesian analysis. An initial increase in aggregate demand leads to a larger total increase in National Income. (The Essence of the Economy by Nellis J.G. & Parker D.1996Pgs 64-65) Considering the present context of fall in House price in USA, it is observed, using the Keynesian theory, that there would be a consequent fall in the National Income. As a result of this, considering the national income multiplier effect, the demand would also fall as is evident from diagram. The impact of increasing Government Expenditure upon the aggregate demand. (ANNEXURE III) Rates of Increase or Appreciation of House Prices in the US fell sharply registering a 10.06 % fall during the II Quarter of 2006 than they were a year earlier. This is a sharp decline of1% point from the previous quarter. The possible decrease in the Appreciation Rates of House Prices could be attributable to Higher Interest Rates, Drop in Speculative Activities and rising Inventory Costs Levels... In many States in the US Prices appreciation rates have declined significantly, inter alias, due to the above causes. The larger effects of fall in appreciation Rates of have been in areas which ,recently have felt great appreciation The recessionary trend in the US real estate business has effected several economies ,including that of the UK. Recession today is a worldwide phenomenon and the effects of it, caused by the US cannot be avoided in other parts of the world, the UK included. Another important reason for it is the large withdrawal of monies from UK Housing Projects since a bulk of the UK investments in USA is in the Housing Sector, thus creating a recessionary trend in the economy. The situation in the US is that there is a steep fall in Mortgage Rates in last two years which affects the House Prices. Since the UK economy has invested in US real estate capital, the effects would definitely be felt in UK economy too, since the Rate of Return on Capital would reduce in UK. In UK since 1996, yearly investments on Housing Projects were growing by 4%, but now that has slipped to 1.5%, since investors are bearish about investments in real estate market. There were available, 30-year Mortgages at @ 6.8% Interest. Now, 25 year Mortgages are available for 5.5%, thus showing the fall in demand for Housing Projects. Injections/Withdrawals in the Circular flow of Income caused by: CONCLUSION From the above, it is clear that the decrease in Investments/Injections brought about by the steep fall of House Prices in USA, is caused by the fall in aggregate demand .demand for the House Prices. This is because UK investors have made major investments in US Real Estate Markets, and the fall in Prices would bring down the level of Investments in UK thus resulting to a recessionary trend in UK. The prognosis for the US Housing Industry has been rightly forecast as “for a long time, one of the possible triggers for the next global slowdown seemed to be a sharp fall in the US housing Market”(Source:http://news.independent.co.uk) . Works Cited Office of the National Statistics (ONS): (accessed December 22, 2006) Home page: Forbes: (accessed on December 22, 2006) Nellis, J G and Parker D, 1996. The Essence of the Economy (2nd Edition), Prentice Hall. National Income Accounting: (accessed December 23, 2006) Home Page: Hants: (accessed December 23, 2006) Home Page: News Independent: (accessed December 24, 2006) GDP Growth: (accessed December 24, 2006) Annexure-I GDP changes Interpretation: “Growth in the third quarter of 2006 is driven by a rise of 0.8 per cent in the service sector, with growth strongest within the business services and finance industries. Manufacturing output increased by 0.6 per cent in the third quarter, the third consecutive quarter of growth. Construction output rose by 0.7 per cent. Household expenditure rose by 0.4 per cent, following 0.9 per cent growth in the second quarter of 2006. Growth in the third quarter of 2006 is driven by growth in expenditure on semi-durable goods. Government final consumption expenditure in the third quarter grew by 0.8 per cent and is now 2.1 per cent above the level seen in the third quarter of 2005.The deficit in net exports in the third quarter of 2006 widened to £10.3 billion from £10.1 billion in the previous quarter, due to an increased trade in goods deficit. Compensation of employees, measured at current prices, rose by 1.1 per cent, compared with 0.3 per cent in the previous quarter. Within this, wages and salaries grew by 1.0 per cent reflecting higher levels of employment and continued growth in average earnings.” (GDP Growth http://www.statistics.gov.uk?CzCI/nugget.asp?ID=192) Annexure-II BOP rates Current account the current account deficit widened to £9.4 billion in the third quarter, from a revised deficit of £8.3 billion in the second quarter. This is equivalent to -2.9 percent of GDP. The income balance fell from an £8.8 billion surplus in the second quarter to a surplus of £6.6 billion in the third quarter, mainly due to higher foreign earnings on direct investment in the UK. The deficit on goods and services narrowed to £13.3 billion from £14.3 billion in the previous quarter, mostly due to a lower deficit on finished manufactured goods. The UK recorded a net international investment liability position of £237.5 billion in the third quarter. Revisions Data have been revised from 2005, primarily to incorporate annual Foreign Direct Investment (FDI) survey results together with trade in services and insurance and pension fund survey results. There are also revised estimates on dividends paid to non-resident investors in the UK stock market. These new data have revised the current Account balance down by £2.1 billion in 2005, and down by £1.5 billion and £1.3 billion in the first two quarters of 2006 respectively. (GDP Growth-http://ww.statistics.gov.uk? CCI/nugget.asp? ID=192) Annexure-III The impact of increasing government expenditure upon aggregate demand Read More