Effect of the UK Governments Debt Reduction Plan on the Bury Sports - Case Study Example

Effect of the UK government’s debt reduction plan on the Bury Sports Mr. Gordon Brown, prime minister of UK has said that the government would like to adjust its plan regarding the debt reduction in the budget. This signifies that a tight election is ahead of the Britons in the coming June, 2010. Regarding this issue the conservatives have argued that they would like to cut the debt in the present year and want to continue the policy further in the near future. According to Mr. Brown, U.K. economic revival and improvement are still weak and there is no certainty that the economy may not drop back into depression again. As the rate of economic recovery in the Europe is very poor this may create some problem for the U.K in guessing the future of the export sector. The UK public sector budget deficits, which are recorded since 2002-03, have already reached at the level of £6.0 billion in February 2010, more than double in comparison with its previous year level. Net capital borrowing has increased almost one and half times more to £12.4 billion than its previous year level. As a percentage of GDP the net public sector debt of the UK government has touched to 60.3 per cent in February, 2010, a 10 scale higher than the level of February, 2009. At the end of February, 2010 the net debt also has increased to £857.5 billion from a level of £712.4 billion in February 2009. Net public sector borrowing has also jumped to £49.4 billion from the level of £ 32.4 billion, at the end of the third quarter of 2009-10. Excluding the financial interventions, the public sector net debt has risen to £741.6 billion by the end of February, 2010 from the level of £596.9 billion which was seen in February, 2009, exactly before one year. (Monthly: £6.0bn budget deficit, March 29, 2010; Tanweer, Thompson, n.d.). Keeping these issues in mind the government has taken a deficit reduction strategy. This set the path to Mr. Alistair Darling, Chancellor of the Exchequer to take an aggressive decision towards the reduction of debt. The government has planned for high cuts in its public spending over the coming two years. Mr. Darling intends to reduce the general government spending excluding capital investment, interest on debt and social welfare costs by almost 1.5 per cent and 2 percent in 2011 and 2012 respectively. (Fiscal Responsibility Bill, 2009-10, pp. 1-3). With the outlook of bringing the budget back into balance within 2017 financial year, the government would like that its budget deficit as a percentage of GDP may fall to almost the half level of the present year standard. With the recommendation of the Confederation of British Industry if the government wants to increase the speed of its debt reduction strategy, it requires to freeze up its daily spending. However, people think that the debt reduction policy of the government will get its peak only after the election of this year. However, if the government wants to accelerate its budget deficit plan within a period of four years, then there will be something to think about the processes through which the British treasury will plan to reach its debt reduction target. Then how the tightening of the fiscal policy will affect the economy? Will tax rate increase further? Will the government expenditure fall further? How this policy will affect the small and medium sized companies? (Jones, March 11, 2010; Seager, October 2009). The fear of recession has not yet been over as many economists argue that the thought that the UK economy has already reached at the bottom of the recession may not be valid one. In this regard the tightening of fiscal policy may not completely deal with the trauma of the businesses, which is the key anxiety for the clients. In 2010, through out UK lower down of business investments have been noticed which is sufficient to tell about the need of availability of credit and the existence of monotonous business buoyancy. In case of the small and medium enterprises (SME’s) like Bury Sports, a small limited company, insufficient availability of credit is a very concerning issue and emerging problem. With the government approach towards its debt reduction policy, this problem will be aggravated further. In an environment of political flux, such a policy may further tame the confidence of the businesses by effecting the business health of the economy. The increase of taxes may stifle and suppress the entrepreneurship and innovativeness in the UK economy. The importance of government expenditure for growth of the economy and businesses cannot be neglected. However, there is no doubt that the anxiety regarding the degree and temperament of the cuts in government spending will be exhaustive. Beside, the political dilemma and instability are the two such key issues, which avert the companies to recuperate and improve their business spirits more strongly. In taking any business and investment decision the companies will think twice by considering the fact of uncertainty over the extent of future taxes and post-election environment. These situations create doubt about the increase of the bank liquidity in the economy. At the present scenario, the banks are giving credits but in a very selective way and under very firm terms and conditions. Due to lack of reasonable demand, the manufacturing industries are facing losses. Decline in the retail sector has also been noticed in some areas. The same story is also true for the financial services industries. Business services and consultancy companies have considered retrenching their level of employees as a cost cutting technique since their clients demand discount in the services. The consumer credit markets have not become strong enough and so the demand for housing has not risen to a sharp level. Theses incidents lead the construction and real estate developments to become stagnant. These entire phenomenons are increasing the fall in demand in one hand and rise in unemployment in the other hand. In this circumstances, a tightening in the government expenditure with an increase in taxes are also roasting entrepreneurship. It has been seen that a tax rate and the change in the tax policies for the non-residents are inducing the top executives and senior management professionals to move away. The policy of cut in VAT may then have very little effect, which would at least be noticeable. Change in the non-domicile tax policy has caused the executives and senior management to move to other places. Also, it may be noted that, “In Scotland, quantitative easing is judged to have had little visible effect on the Scottish financial sector, and other broad policies such as VAT cuts have had similarly little noticeable effect. Meanwhile, Northern Ireland feels that Westminster-centric policies are simply not having an impact locally” (Hunter, January 2010). The credibility of exchange rate volatility, high restriction in meeting the requirements of the capital market and macroeconomic instability further have irritated the companies in taking any kind of business innovative adventure. (Hunter, January 2010). The effect of the policy of fiscal tightening on the overall demand of the economy may be downbeat. The government may wish to implement such policy by cutting the present government expenditure. This policy may put a downward pressure on the overall GDP of the economy. In another way, the government may want to pursue its policy by cutting its investment expenditures. With the fall of investment in the economy it obviously will face a downturn in the growth of its GDP. (Weale, April, 2009, pp 6-7; Bunea-Bontas, Aurora and Peter and Cosmina, November 2009) Finally, with the increase in taxes (both the direct and indirect) the government has supported its intension. In case of direct taxes the government may increase the rate of taxes or it may increase the level of taxes. However, whatever may be the form, an increase in tax will directly or indirectly affect the citizens of the nation with the fall in their disposable income. This ultimately leads to a downturn to the country’s GDP. Therefore, a rational judgement of the present economic conditions of UK suggests that the UK needs a fiscal tightening at present and its initial effect on the economy may be contractionary. However, a speedy tightening may guide to a further recession and a fiscal crisis and a sluggish tightening may first guide to a fiscal crisis and then a recession. (Brewer, Browne, Leicester and Miller, February 2010; Mountford and Uhilg, July 2005). Bury Sports is a small limited company which sells different kinds and varying ranges of sporting and leisure activities. Its product ranges vary from Golf to Hockey playing materials, from archery to cycling instruments, almost every sports item whether it is an indoor game item or an outdoor game item. Its clients vary from local schools to sports club, from health professionals to sports coaches, etc. So Bury Sports is a retailer of the sports related items and equipments. With the effectiveness of the government’s tight budgetary policy the Bury sports will be affected in many ways directly and indirectly, like other SMEs. The first and foremost effect is that if the company wants to expand its business it may get little support from the government as the credit getting possibility has been lessen in one way and the norms and regulations towards achieving such loans become very strict. This is a great impediment towards the expansion of the businesses for the small and medium enterprises as they always need government support for their business promotion. This kind of unsupported policy of the government will not only hurt the confidence of SME like the Bury Sports, but also may insist them to take any contractionary policy towards their business plan. Second, the overall demand in the UK economy is still very low, as the country has not got out from the brutal shock of the recession. In these circumstances tightening of the fiscal policy through the increase in taxes may further decrease the demand in the economy. Reduction in demand will directly hurt a small company like the Bury sports. The government’s policy of budget cut with a fall in public investment may delay the construction of new sports academies, new health organizations and postpone the development of new schools and collages. These organizations would possibly become the clients of the Bury sports, but with the cut in budget there is a large probability that the company will have to forgo the businesses with theses organizations at least at the present time. Even it is also possible that the company may loose some of its present clients. For example, suppose one of its existing clients wants to expand its sports related activities and selects the Bury sports as their probable vendor. But as the government’s tight budgetary policy may result in a rejection of the client’s proposal for loan application, it has to cancel its expansionary plan. This approach of the client not only affects the client itself but also affects the Bury sports and ultimately results in the loss of the business proposal for the company. Demand for the sports product may go down due to the fall in real income of the near by citizens. An increase in income tax will create less amount of money in hand of people. Generally, the people of an economy purchase sports good after the fulfillment of their primary needs, such as purchase for foods and clothing. As an increase in tax rate results in reduction of money for purchase, the share of the money kept for the purchase of sports product subsequently fall and so the companies like Bury sports who sells sports product will be affected further. Notwithstanding, few economists expect that the UK economy is likely to experience a fall in inflation rate from the January level, the highest level in the last 14 months. This may little bit help in increase in demand for sports items, but one can reasonably argue that it will not increase the demand for sports product relatively to a very high level. However, if the interest rate falls then it will increase the real wage rate in the economy. A small company like Bury sports may take this opportunity by cutting the level of its employee. This kind of cost cutting approach may help them somewhat. One thing should be noted here. As the possibilities of further recession have not yet been evaporated, so, there is a possibility that the government may like to take an expansionary monetary policy beside its debt reduction plan for boosting the economy. This may reduce the concern of the SMEs to some extent. However, to get the complete picture we have to wait till the coming election. References Jones, D (March 11, 2010): “FOCUS: UK Brown Digs In On 4-Year Debt Cut Plan”, The Wall Street Journal. Available at: http://online.wsj.com/article/BT-CO-20100311-700295.html (accessed on March 30, 2010) Hunter, L. (January, 2010) “Regional Trends”, Pricewaterhousecoopers. Available at: http://www.pwc.co.uk/scotland/pdf/regional_trends.pdf (accessed on March 30, 2010) “Monthly: £6.0bn budget deficit” (March 29, 2010), Public Sector, Office for National Statistics. Available at: http://www.statistics.gov.uk/cci/nugget.asp?id=206 (accessed on March 30, 2010) Bunea-Bontas, Aurora, C and Peter and M Cosmina (November 2009), “ Fiscal Policy during current crisis” MPRA. Available at : http://mpra.ub.uni-muenchen.de/18676/1/MPRA_paper_18676.pdf (accessed on March 30, 2010) Seager, A (October 2009), “Has Darling or Osborne the best plan for cutting the deficit?”, guardian.co.uk. Available at: http://www.guardian.co.uk/business/2009/oct/11/budget-deficit-reduce-osborne-darling-conference (accessed on March 30, 2010) Brewer, M, Browne, J, Leicester, A and H Miller (February 2010), “Options for fiscal tightening: tax increases and benefit cuts”, The IFS Green Budget. Available at: http://www.ifs.org.uk/budgets/gb2010/10chap7.pdf (accessed on March 30, 2010) Mountford, A and Uhilg, H (July 2005), “What are the Effects of Fiscal Policy Shocks?”, Economic Risk, SFB 649.Available at: http://141.20.100.9/papers/pdf/SFB649DP2005-039.pdf (accessed on March 30, 2010) Weale, M (April, 2009), “Commentary: Fiscal Policy and the Fiscal Position” National Institute Economic Review, No. 208, pp 4-8.Available at: http://www.niesr.ac.uk/pdf/060509_155123.pdf (accessed on March 30, 2010) “Fiscal Responsibility Bill” (2009-10), Library Note, House of Lords. Pp 1-9. Available at: http://www.parliament.uk/documents/upload/LLN2010_005.pdf (accessed on March 30, 2010) Tanweer M, Thompson H (n.d.), “ Macroeconomics”, Fiscal Policy 2010. Available at: http://www.tutor2u.net/blog/images/uploads/FISCAL_POLICY_09-10_MTS.pdf (accessed on March 30, 2010) Read More