UK Economy: Debt and Reserve Management - Assignment Example

UK ECONOMY Introduction: During the second half of 20th century, communism collapsed in Europe and it was replaced by the western political and economic system. The financial awakening of a nation mainly focused on its economic development as a whole. Economic development means development in both public and private sectors. “As one of five permanent members of the UN Security Council, a founding member of NATO, and of the Commonwealth, the UK pursues a global approach to foreign policy; it currently is weighing the degree of its integration with continental Europe.” (United Kingdom). Economic development in UK brought about major changes in world economy and led to International development. The Economist, of the country had a detailed study of the economic condition of socialist countries. There was also an effort in bringing the balance of payment into the equilibrium and correcting economic imbalances. Further, an implication of liberalization also provided a conducive atmosphere for economic relations with other countries. Finally, there was an effort in building the institutions to sustain a market economy. Also there was a transfer in the ownership from public to private hands. UK Economy has experienced drastic growth in the service sector. The service sector is having a rapid rate of expansion since early 2004. The economy also noticed a slower gain in business investment and continuous expansion in private consumption. UK has a leading trading power and financial centre; it is one of the main reasons for economic development in Western Europe. Over the last two decades, the government reduced public ownership and growth of social welfare programs. Agricultural field produces 60 % food needs with less that 2 % labour force. The country has a wide range of natural resources like coal, natural gas and oil reserves. Energy production accounts for 10% of GDP. The service sectors like banking, insurance and public service accounts for large portion of GDP, however, industry growth continues to decline. UK economy is one of the strongest in the European Continent. The inflation, interest rates, and unemployment remains low. The government is also taking ample measures to improve various sectors like education, transport, and health services. The Economic System of United Kingdom: There was a drastic increase in the service segment in the year 2006. The Central bank opted for an earlier than expected quarter point hike in January. There was only slower gain in business investment, but private consumption registered a wide expansion. In the year 2006, economy accounted for a high improvement by gaining 0.8% q/q and 3.0% y/y in the final quarter. This in turn, led to a strong position in GDP growth since the first half of 2004. However, in 2005 there was a monetary tightening which induced a slow down in the housing market. UK witnessed a high rate of progress in communication network and services during this time. To be an active player in the global economy, UK recognised the importance of communication as a competitive advantage and fundamental requirement. There was a tremendous progress in IT and communication, which led to effective business activities. Private Companies, recognising this potential, invested heavily in the economic infrastructure. The Chancellor of Exchequer Mr. Gordon Brown has pointed out that a new strategy for a single market is needed to equip Europe’s economy for facing the challenges of 21st century. The main success of the European Union is because of the adoption of Single Market Project. The European economy had to face a lot of challenges in relation with the rapid technological and structural changes in global economy, aging population and climatic changes. Macro economic policies used by United Kingdom in the last 3 years: The macro economic study of UK can be broadly studied under the following heads: 1. Debt Management 2. Exchange Equalisation Account 3. Fiscal Policy 4. Monetary Policy 5. National Statistics 6. Public bodies and Public appointments Debt Management: Since 1998 onwards debt and reserve management report are published annually for evaluating the economic structure adopted in UK. For analyzing the business condition that existed over the last three years, debt and reserve management report is taken as a base. In the year 2004-05, there was a high performance of national savings and investment in the retail sector. There also existed a well functioning and liquid gilt market, which is necessary for balancing the cost and risks associated with gilt portfolio. The year viewed a longest in the maturity and duration of the Government’s marketable domestic debt as compared to other European countries. The main objectives of Government’s debt management policy is “to minimize over the long term, the cost of meeting the governments financial need, taking into account risks, whilst ensuring that the debt management policy is consistent with the aims of monetary policy.” (Debt and Reserve Management Report 2004-05 p.12). The Debt Management policy objectives during this year were: a) Implementing an issuance which is open, transparent and predictable. b) Issuing gilts that achieve a bench mark premium c) Radical adjustment in the nature and maturity of the Governments debt portfolio. d) Developing an effective gilt market e) Providing a cost effective saving instrument to the retail sector through national savings and investment. During the years 2005-06 the government debt management has focused on certain objectives. These are: a) To achieve the annual remit for the sale of gilt by HM Treasury ministers with due consideration to long term cost minimization taking the risk factor too. b) To encourage the ministers on setting the remit in achieving the debt management objectives. c) To implement policy and to promote advances in new instruments, issuance, techniques as a structural change of the debt market which will lead to lowering the cost of debt financing d) To conduct market operations orderly and to maintain efficient markets and promoting a liquid market for gilts. e) To contribute to the development of medium term strategy for the debt portfolio. f) To provide open information on the debt market. Exchange Equalization Accounts: It was established in the year 1932 for checking undue fluctuation in the exchange values of pound sterling. It includes UK’s reserves of gold, foreign currencies and International Monetary Fund (IMF) and Special Drawing Rights (SDR). New Exchange Equalization Account Act (EEA) was passed in the year 1979. This was used to secure the conservation or disposition in the national interest of making payment in abroad. It was also used for certain purposes related with UK’s membership of the IMF, including the holding, purchase and sales of SDRs. The EEA is under the control of the treasury and has appointed Bank of England for carrying out day to day dealings in foreign currency and to the investment of the resources. During 2004-05, constant measures were taken to review the banks performance in managing the reserves. It was proposed that EEA investment needs to be highly liquid in order to make it quickly available for other permitted users. Fiscal Policy: “The moderate and democratic method of reducing inequalities of the income is by Fiscal Methods. This methods depends on Government intervention in the re distribution of purchasing powers from the rich to the poor.” (Sankaran, S. Business Economics). UK’s Fiscal Policy is directed towards maintaining an effective public finances system over the medium terms based on certain strict rules. It provides a platform of stability for achieving sustainable level of growth and employment. There are five principles of fiscal management. These are: a) Transparency – means setting and implementation of fiscal policy b) Stability – its impact on the economy c) Responsibility – related with the management of the public finance d) Fairness – including between generations e) Efficiency – design and implementation of fiscal policy. The government has specified two key fiscal policy rules. They are: 1) The Golden Rule – the government will borrow only to invest and not to fund current spending. 2) Sustainable Investment Rule – public sector neglects as a proportion of GDP will be held over the economic cycle at a stable level. Fiscal rules are actually a benchmark for the performance of the Fiscal Policy. Monetary Policy: The Monetary Policy Committee is entrusted with the responsibility of choosing the appropriate rates of interest to meet the government’s price stability objectives. The monetary policy is characterized by high levels of openness, transparency and accountability. Monetary policy of UK has helped in improving the stability of prices. The monetary policy decisions of UK have been more forward looking. The country adopts a proactive monetary policy focused on symmetric inflation targets together with a prudent fiscal policy, which provides the foundation for economic stability. Though in early years, monetary policy in UK have not worked well, the government have taken serious steps and to prevent any repeat of previous mistakes. More emphasis was given to stability in growth and employment, price stability, symmetric inflation target which is supporting Governments objectives for growth and employment; a clear role of monetary policy is to meet the inflation target, an independent committee of experts was formed to implement this policy. The monetary policy was characterised by high level of openness, transparency and accountability. This policy was also formed in such a way as to respond to the economic shocks during the time. Through the implementation of these features UK’s monetary policy framework is ranked among the world’s best. National Statistics: “The Office of National Statistics (ONS) is the main source of a broad range of statistics relating to the UK as an environment for business. Statisticians compile information relating to a number of themes including agriculture; energy and industry; crime and justice; economy and education and training.” (UK Economy, Statistics & Research). It provides a statistical service that is open and responsive to the society needs of the society. It represents a legacy for delivering statistics that will command public confidence. National statistics will give a meaningful description of the UK economy and society. It further acts as a guide in the formulation and monitoring of economic and social policies by government at all levels. It provides business with statistical information and promotes efficient functioning of commerce and industry. It also improves a quality of services to customers both within the Government and wider community. It also enhances public confidence. Public Bodies and Public Appointments: There are different bodies in regional and national level where the ministers used to make appointment. These bodies are called as ‘Qunagos’. They play a major role in the economy of the country. Appointees are those who make contribution to the effective running of the body. They give a considerable contribution in the economy in various fields. Examples of such bodies are Policyholders Protection Board, Court of Bank of England, Statistical Commission etc. In the previous years it was found that the macro economic factors implemented have not given any sort to meet the challenges in the economy. Thus the Government realized the need to up grade the economy and that a tremendous change is required for stabilising the economy and thus the government decided to build up a strong economy with global competitiveness. The Government’s economic objectives are to build a strong economy and a fair society, where there is opportunity and security for all. New fiscal rules have created a strong platform of economic stability. There was a steady growth in the economy due to low and stable inflation, fair interest rates set by the Monetary Policy Committee and a fair fiscal policy supporting Monetary policy. There also has been a tremendous growth in GDP. The UK Economy has achieved a stage in such a way in meeting long term global challenges. Business, communities and individuals all are ready to respond to the changing global environment. The Budget 2007 will help further to enhance international competitiveness, encourage investment and promote innovation. The Government also introduced a system to ensure that everyone pays his or her fair share of tax. The country also implemented modernization in the tax and benefit system especially to provide support for pensioners. For the last 10 years, the Government’s macro economic framework delivered more stability in terms of GDP growth and inflation rates. There was a 2 ¾ percent of economic growth in 2006. Also when talking about productivity, UK has experienced a low rate of productivity growth in the early years. But now, in recent times, there is much emphasis on productivity growth and maintaining stability with level of employment which are central to long term economic performance. Science, innovation and creativity are important drives for productivity growth with the help of high skilled workforce and a competitive and enterprising economy. The Government focus on 5 key strategies for improving productivity performance. They are: a) improving competition b) Promoting enterprises c) supporting science and innovation d) raising UK Skills ie creating a productive work e) encouraging investment. The Government of UK also have on its main agenda to provide employment opportunities for all. It has decided to attain 80% of the working age population. The government further plans to move people from inactivity to labour market participation. There is a high performance rate in the UK labour market in the following years. In 2006 the employment in UK was 29 million. This was a record figure in UK history. The unemployment has fallen to 5.5 %. The government has taken various measures to increase employment opportunity by a) delivering employment opportunity to all ie. to provide support to people to move to work b) extending employment opportunity ie to remove the obstacles c) increase skills and mobility d) making work pay ie considering National Minimum Wage, providing credit facilities and improvement in incentives. The economy also viewed flexibility with fairness as their long term economic goal. Through fairness, security and support are ensured. The government has is also made efforts to achieve millennium development goals for overcoming global poverty and for reducing debt in the poorest countries. The UK government has imposed a complete support of for families and children, support for pensioners, various measures were initiated to encourage savings, and many policies were implemented to improve the tax system. The Government also in tool measures in delivering a top world class public services. These include high quality education and training, a modern health service, a fair and effective criminal justice system and good transport system. There was a formation of a new framework for managing public spending. Extra resources were allocated for public services. The Government has also taken various measures in protecting the environment. Climatic change is an important challenge faced by the country. Various environmental objectives include tackling climate change, improving waste management, protecting the UK’s countryside and natural resources. The Government is taking measures to deliver sustainable growth and to tackle the global challenges of climate change. Budget 2007 and its impact on the UK Economy: The Chancellor to the House of Commons Mr. Gordon Brown presented the Budget on 21st March 2007. The budget stressed upon building Britain’s long term future focusing on the prosperity and fairness for families. “The Economic and Fiscal Strategy Report and the Financial Statement and Budget Report contain the Governments assessment of the medium-term economic and budgetary position.” (Report, Building Britain’s long term future – Prosperity and fairness for families). The budget has clearly set out the government tax and spending plans, including public investment and to emphasis on social, economic and environmental objectives. The Government is focusing to build up a strong economy and a fair society where there is opportunity and security for all. The present budget has put measures to simplify the tax system by cutting the basic rate of Income tax from 22 pence to 20 pence applicable from April 2008. There is an increase in the upper earning limit for National Insurance. There is a rise in the higher personal allowances for those aged 65. There is an increase in the threshold for working tax credit. There is a reduction in the headline corporation tax. The government also simplified Capital allowances. There is a considerable enhancement in the research and development tax credit. The investment in education has also increased. The budget proposed to restrict tax relief available on empty commercial properties to encourage the supply of office, retail and industry premises. The budget introduced further reforms to modernize and simplify the tax system to lock in stability and increase investment in the UK’s future. The Budget in the long term point of view is trying to maintain macro economic stability ensuring that the fiscal rules are met and inflation remain low; that an increase in productivity and innovation, providing employment opportunity for all, providing security for people focusing on child and pensioners, providing a effective public services can all tackle the environmental challenges such as climate changes and global price changes. The current budget is moving clearly into surplus stage. The public sector net debt is projected to remain low and stable over the forecast period. The Budget 2007 has taken steps to strengthen the drives of productivity growth and meet long-term challenges of the global economy by implementing a major package of reforms to the corporate tax system. There was a simplification in the capital allowance system and also further enhancements to the SME and large company Research and Development tax credit Schemers. There was also an implementation of Hampton review’s risk based approach. The Budget also tried to maintain the Government’s commitment that private and public sector Research & Development reach 2.5% of GDP. It also focused on reforming empty property relief in business rates. The Budget 2007 is also taking further steps in strengthening the labour market by providing support to those who have problems in coming forward for jobs. Some of the major reforms to encourage employment in the Budget are a) providing further help to lone parents to stay in employment, b) a four-week run on in entitlement to working Tax credit, c) testing reforms to the education and training offered to participants on new deal for young people, d) local employment partnerships with large retail employers, and e) raising the adult rate of the National Minimum Wages. The present budget has emphasized measures for modernizing the tax and benefit system which will provide more support for work, families and pensioners. The basic rate of income tax was made in a simplified manner by making a simpler structure of two rates that is 20 pence basic rate and a 40 pence higher rate. The Economy has witnessed an increase in the upper earnings limit for national insurance. The Government also raised the upper earning limit. The Government increased the personal allowances for those aged 65 or over. The Government raised the withdrawal rate on tax credits by 2% to 39%. There was also an increase in the annual Individual Savings Accounts Investment limit. Small grants were given for community organization. The present budget has taken effort to maximize resource available to improve frontline services and fund new priorities. The current spending in public services was increased. More amount was allocated for education. Additional resources were allocated to support the Government’s vision for personalized education especially in subjects like English and Maths. Further steps were taken to accelerate the ongoing development of counter-terrorism capabilities. For this an amount was allocated for the security and Intelligence Agencies. The budget proposal emphasises to adopt a full scale demonstration of carbon capture and storage. There was also an increase in fuel duty rate. In vehicle excise duty rates there was a major increase for most polluting cars. There were measures to examine the vehicle and fuel technologies to lower pollution. A package of measures to support bio fuels was adopted. Conclusion: For the last 10 years the Government’s macro economic framework has delivered more stability in terms of GDP growth and inflation rates. The UK Economy is in a strong position to respond to the Global Economic challenges of the next decade. The Government’s macro economic framework is designed in such a way to maintain long term economic stability. The Government’s Fiscal policy is based on 5 key principles that is transparency, stability, responsibility, fairness and efficiency. To conclude, the budget supports the Government in achieving their objectives in various areas like promoting enterprise, skills and science, creating employment opportunity, tacking child and pensioner poverty and also protecting the environment. Works Cited United Kingdom. The World Factbook. 17 Apr. 2007. 23 Apr. 2007. . Debt and Reserve Management Report 2004-05. HM Tressury. p.12. Sankaran, S. Business Economics. 4th Edition. Margham Publications. p.318. UK Economy. Statistics & Research. UK Economy i-uk.com Report, Building Britain’s long term future - Prosperity and fairness for families. Budget 2007. Index, Budget 2007. Read More