Analysis and Opinion on June 2010 UK Budget Report - Essay Example

? Analysis and Opinion on June Budget Report of the of the Analysis and Opinion on June Budget Report Instructions: (1) Explain briefly the Government's main macroeconomic objectives as set out by the chancellor in the June 2010 budget, and any major macroeconomic problems that are highlighted in the budget report; AND (2) Critically examine how the policy measures discussed in the budget might influence the achievement of the Government's macroeconomic objectives. Introduction Lies, bloody lies and incorrect statistics- this is what brought the Gordon Brown led Labor Government down in Britain a few months ago. The new coalition Government led jointly by Nick Clegg and David Cameron promised to usher in a new era of prosperity and recovery, and at least be truthful to the public in order that its integrity never have to be questioned. The first step was to take stock of reality and let the public know how good or bad things were. Once this was established, new austerity measures were soon on the anvil to mend the state of the economy and bring the UK to a better path on the road to recovery. While everyone acknowledges that we are still not out of the woods yet, there has been some recovery in key sectors like banking, insurance and retail sales- which shows consumer confidence in the present Government and its ideals and vision for the future. The Budget is a key instrument for controlling the incomes and expenditures in the economy. The important difference between a household budget and a Government Budget is that in the former, a housewife usually has a good idea of the income and tries to meet expenditures and maybe even save for a rainy day considering this fixed income. On the other hand the Government looks at the expenditures first and then tries to raise the required incomes through various sources like tariffs, rates and taxes of various kinds put on individuals and firms and businesses of all kinds that operate in the economy. The fiscal and monetary policy are other tools and instruments by which the Government and the Treasury hope to control the rate of interest, lending and borrowing and spending and saving within the economy. Care must be taken to keep the British Pound and the Euro at a good rate of exchange on the open market, while reducing signs of inflation or deflation at home. Tariffs, taxes and rates indicated in the Budget also do have an impact on the trade policy and the volume and type of import and export transactions that take place in the light of budgetary restrictions or allowances. In the long run these will impact the UK’s balance of trade and balance of payments on current and capital account vis-a-vis its trading partners. Macroeconomic Objectives of the June 2010 Budget A review of the June 2010 Budget document as unveiled by the Chancellor of the Exchequer on 22 June 2010 indicates that two main macroeconomic objectives are to (a) rebalance the UK economy and (b) put it on the path toward sustained economic growth (Budget Document, p1). In order to achieve these twin goals, the Government has determined that action needs to be taken in three areas: (1) deficit reduction, (2) creation of business opportunities for private enterprise and (3) ensuring in fairness that all sectors contribute to deficit reduction. The Government has even created an Office of Budgetary Responsibility (OBR) and this institution has been entrusted with the task of reviewing the policy measures taken by the Government and their execution from time to time to ensure that these steps will reduce the deficit and contribute towards sustained economic growth in the future. The OBR in its review of the June 2010 Budget document has already opined that there is a more than 50 percent chance that these measures will achieve the Government’s planned macroeconomic objectives of reducing the deficit, meeting fiscal and debt policy objectives and thereby kick-starting the economy towards sustained economic growth. Macroeconomic Problems Highlighted in the Budget Report The Budget Report attached with the June 2010 Budget document very succinctly highlights the state of the UK economy. It has been estimated that monetary and credit expansion was behind the high rate of borrowings by both public and private sector individuals for the purposes of mortgages and consumer credit. In consequence the volume of borrowings had peaked in 2008, and the credit crisis and recessionary trend seen all across the world exacerbated this issue in the UK. It is estimated that the crisis had reduced national output in the UK by 6 percent per year. It was the closest thing to the Great Depression of the 1930s. In 2008, household mortgage borrowings were 100 percent of GDP and private sector firms had also borrowed at 110 percent of GDP. The financial sector in the UK had also become one of the most leveraged in the world. In fact we were even worse off than the USA. There were public sector imbalances too, as public sector borrowings rose from 41 percent of GDP in 2009 to 48 percent of GDP in 2010. No wonder the IMF had estimated in May 2010 that UK borrowings to put the economy on track would be one of the highest among the G20 countries in 2010. The budget deficit had reached 11 percent of GDP in 2009-10 (Budget Report, p7). How the Policy Measures Introduced in the Budget Would Hope to Accomplish the Government’s Macroeconomic Objectives As explained above, the present UK Government has followed a three pronged approach in order to reduce the Budget deficit and bring back the UK on the path of economic recovery and progress. To this end, it has devised a well laid out plan over the next five year period to reduce the budget deficit, control and reduce public sector expenditure and Government spending. It is clear that a closer watch needs to be kept over macroeconomic indicators like the rate of interest and monetary expansion in the economy. Both fiscal and monetary policy constraints can be employed to restrict the rate of monetary expansion and control both interest rates and money supply in the economy. At the same time, the Government is serious about promoting private business expansion through reducing tax rates, reducing regulation and increasing focus on providing infrastructure and opportunities for regional development (Budget Report, p10). In order to encourage fairness and initiative among the people in the UK and protect the most vulnerable sectors like welfare and child support, the present Government has sought to increase personal allowances by ?1000 for pensioners in the age bracket 65 years and below. These gains will be limited to those however who pay a basic tax rate. The Government will also raise the capital gains tax to 28 percent on those who pay high rates of tax. Child support is to be frozen for three years. These measures will hopefully address some disparities in the economy. Conclusion From the above, we can see that the present UK Government appears very genuinely committed and focused upon controlling and reducing the budget deficit in the UK over a five year period. Hopefully its policies, good governance and proper monitoring and control of these all important macroeconomic variables will help attain the Government’s planned objectives and not only reduce the deficit but also put the UK back on the path to economic recovery and prosperity. References Her Majesty’s Treasury (2010). The Budget, June 2010. London: the Stationery Office. Her Majesty’s Treasury (2010). The Budget Report, June 2010. London: the Stationery Office. Read More