Qatar and United Kingdom - Emphasis on Fiscal Policy and Inflation - Assignment Example

?Qatar and United Kingdom: A comparative study. (Emphasis on Fiscal policy and Inflation) United Kingdom (UK) and Qatar belongs to two different geographical spheres of the world. It is most likely that the economic and socio-economic scenario in both of these countries would be entirely different. UK, the third largest economy in the Europe (Simeon, 2012, p.203) continues to struggle to come out from the economic slowdown, with the prospects for swift growth hampered by the ongoing European sovereign debt crisis, and significant structural reforms are still desirable (United Kingdom, 2013). On the other hand, the discovery of oil in the 1940s transformed Qatar (O’Brien, 2010, p.412). At present, it has high standard of living with highest GDP per capita in the world as of 2010 of more than USD 88,000 (Greenfield, 2012). For the present paper a comparison of the fiscal policies and inflation rates of these two countries are considered. Furthermore, in the UK, during the regime of the labor governments, government’s size and spending grew significantly. Compounding the budget deficit Labor government bailout several British banks in 2008 and indulged in massive government’s borrowing (United Kingdom, 2013). In 2010, after formation of Prime Minister David Cameron’s Conservative–Liberal Democrat coalition government austerity measures were implanted rigorously. In early 2012, the economy returned to recession and growth averaged zero over the year as a whole. In its budget announcement of March 20, the UK govt. decided to stick to its deficit-reduction plan, which is broadly fiscally neutral (United Kingdom, 2013). UK Fiscal Policy and Inflation rate- UK Government’s fiscal plan is underpinned by a forward-looking fiscal mandate to achieve cyclically-adjusted current balance by the end of the rolling, five-year estimate period, as cited in the June Budget 2010. The fiscal mandate directs fiscal policy decisions over the medium term, ensuring that the Government sets plans steady with a reduction in the structural deficit. The fiscal mandate is based on: • A cyclically-adjusted aggregate, to allow some fiscal elasticity at times of economic uncertainty; • A rolling five-year forecast period, to ensure that fiscal consolidation is delivered over a realistic and probable timeframe; and • The current balance, to protect the most productive public investment expenditure. The establishment of Office for Budget Responsibility (OBR) has significantly enhanced the credibility of the UK’s fiscal framework by ensuring that the Government’s fiscal policy decisions are based on independent forecasts for the economy and public finances (Copy of the Budget Report, 2013 p12). Figure-1  (Deficit, national debt and government borrowing - how has it changed since 1946? 2013) UK inflation has been above target since December 2009 and the central bank has quoted this as one reason for not resumption of its bond repurchase program. High inflation has had an erosive impact on the UK economy, reducing households’ disposable income Approximately a 40% rise in food prices and the impact of rising oil and commodity prices coupled with a weakening pound, plus hikes to VAT [sales tax] and tuition fees took a huge toll on the high street (Katrina, 2013). Figure-2  Source: United Kingdom Inflation Rate, 2013 Qatar’s Fiscal policy and inflation rate- While many advanced world economies were twirling under severe recession in the recent past, Qatar has taken head on, the global financial crisis, reflecting timely and focused policy response by the authorities. The considerable advancement of liquefied natural gas capacity, large government support to the banking system, and increase in public spending helped Qatar in sustaining high growth rates. Heavy investment in liquefied natural gas (LNG) production capacity and increases in LNG production over the last couple of years have been the main drivers of Qatar’s robust growth (Qatar Economic Statistics at a Glance, 2012,p.4) Figure-3  (Qatar Economic Outlook 2012-2013 2012) Qatar has witnessed in the last few years high real GDP growth. Throughout the financial crisis, Qatar authorities injected riyals into domestic banks in order to protect the local banking system. Increase in oil price helped Qatar GDP to bounce back. Though economic policy is focused on developing Qatar's non-associated natural gas reserves and increasing private and foreign investment in non-energy sectors, still more than 50% of GDP comes from oil and gas sector. (Qatar Economy – overview, Index Mundi, 2013) Qatar projected record high expenditures of 178 billion riyals for the fiscal year, above the 140 billion riyals planned for 2011/12. Qatar, scheduled to host the soccer World Cup in 2022, (Qatar plans to boost spending by 27 percent in 2012/13, 2012) is likely to augment large-scale infrastructure projects such as Qatar's metro system and the Qatar-Bahrain causeway. The Hamad International Airport is projected to open by the end of 2013 with an annual passenger capacity of 24 million. It has also chalked out revenue of 206 billion riyals, a 26% rise from the previous year's budget plan and a surplus of 28 billion riyals (John, 2013). Figure-4 (Inflation rate (consumer prices) (%), 2013) The inflation rate in Qatar was at 3.7% in April of 2013 (Qatar Economic Outlook 2012–2013, 2012, p.6). As illustrated in the above graph;. Historically, from 2005 until 2013, Qatar Inflation Rate averaged 4.0% reaching an all time high of 15.1% in 2008 partly because of a building boom for the 2006 Doha Asian Games, logistical problems and bottlenecks, including difficulties in bringing enough building materials into the country and a record low of -4.9% in 2009. (Inflation spikes as Qatar gears up for spending spree, 2013) Comparison: Qatar vs. UK So it can be envisaged that UK maintains deflationary fiscal policy (or contractionary fiscal policy / tight fiscal policy, aiming to close an inflationary gap, restrain the economy, and decrease the inflation rate, while Qatar practices expansionary fiscal policy in order to increase aggregate demand through tax cuts and / or higher spending. Also, it can be witnessed that while UK suffers from budget deficit, Qatar, the number one LNG exporter of the world (Qatar plans to boost spending by 27 percent in 2012/13, 2012) enjoys budget surplus. But as it maintains expansionary fiscal policy, it can be concluded that it may suffer from budget deficit in the near future, as its revenue might not be enough to cover-up all its expenditure. In case of inflation rate, Qatar plans to spend about $140bn to build stadiums, roads, railways, airport, seaport and other infrastructure before it hosts the 2022 soccer World Cup, another phase of building boom is on the anvil and as the housing component has the largest weighting in the inflation basket (32.2%), escalating rents are sure to drive inflation in Qatar (John, 2013). Whereas, in the UK it is expected that inflation rate will peak over the summer and remain well above 2 % (High Inflation: a Permanent Fixture in the UK, 2013). Qatar’s economy continues to be “laissez-faire” with foundations of economic freedom solidly in place. With a well-functioning legal framework, the country’s rule of law has assisted vibrant economic growth including double-digit expansion on average over the past five years (Qatar, 2013). The Qatar government has pursued rigorously to reform and thus in a way to improve the entrepreneurial environment and widen the economic base beyond oil and gas. As reflected in the country’s steady improvement in economic freedom since 2008, (Qatar, 2013) the Qatar government has followed reforms to improve the entrepreneurial atmosphere and widen the economic ambit beyond oil and gas. The country’s open trade system and growing position as a regional financial hub have also contributed to private-sector growth outside of the energy sector. Furthermore, weathering of fiscal policy from oil price fluctuation remains a key challenge for Qatar. The link between fiscal expenditure and oil revenues has significantly increased over the last two decades, relative to other GCC countries. The response of fiscal policy to changes in domestic demand has increased in Qatar between 1990s and 2000s, suggesting more pro-cyclic al response during the boom in oil prices in 2000s compared to the “relative’ bust in the 1990s. ‘Lower pro-cyclicality in busts’ can be explained by the facts that an unimpeded country like Qatar can indeed afford to spend more at bad times . But the foremost challenge is then to reverse the fiscal expansion in good times, to avoid spending pressures and instead to save more, thus preventing fiscal policy from amplifying boom in business cycle. This correlation instead decreased in all other GCC countries (Ghada, 2013). The debt crisis in the Euro area has generated intense distress in international financial markets (Prasad et al, 2012, p7). Present euro-zone crisis has taken a big toll over the UK economy, while Qatar's economy is expanding at an unprecedented rate and is set to continue on this trajectory in the years ahead. As stated earlier, UK maintains deflationary fiscal policy as it is marred by present euro zone’s debt crisis, while Qatar follows expansionary fiscal policy, though threat of high inflation is beckoning. It would be not prudent to find out good or bad between them, but both policies are realistic and relevant according to their economic scenario. References 1. Copy of the Budget Report - March 2013 as laid before the House of Commons by the Chancellor of the Exchequer when opening the Budget, (2013) viewed 22 May 2013 from http://cdn.hm-treasury.gov.uk/budget2013_complete.pdf 2. Deficit, national debt and government borrowing - how has it changed since 1946? (2013) Datablog, viewed May 22, 2013 from http://www.guardian.co.uk/news/datablog/2010/oct/18/deficit-debt-government-borrowing-data 3. Ghada, F. (2013), Qatar: Selected Issues, Washington D.C. International Monetary Fund 4. 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