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Wednesday, December 10, 2008

Britain's stimulus plan examined PT1; "Maintaining macroeconomic stability"

While the world has been swept up in the bombast and pomp of Britain's prime minister, Gordon Brown, and his "leadership" amidst such a time of global economic uncertainty. And, while he has oodles of good ideas for everyone. Shouldn't we, as honest and decent observers, give his bail out plan a second look?

The plan to save Britain from an excruciating recession was unveiled by the PM and the Chancellor, Alistair Darling, in late November.

Chancellor's pre-budget report: http://www.hm-treasury.gov.uk/prebud_pbr08_repindex.htm

Aside from running Britain into more debt in the 2009-2010 fiscal year and projecting, quite boldly more debt for the remaining fiscal year 2008-2009, what can we expect in regards to the stimulus package, or, increase in tax credits, or, a decrease in VAT to achieve which warrants higher debt?

I for one, am of the opinion that the UK does not need to dig itself further in debt. In fact, the amount of people now on top-up benefits (social welfare benefits) are phenomenally high. While the Labour party has exacerbated the extent to which welfare services, especially free money to single mothers and the unemployed and under-employed are handled. You have, and I admit, the Thatcherite policies of privatization for the steady increase of unemployment and persons seeking higher employment in the new Britain--post John Major-- to thank!

While I appreciate the fact that people are hurting world wide. The fact that Britons, in regards to low inflation on food items and relatively medium (but rising fast) expenses on travel, tax credits to the currently un-empowered do very little to give greater benefits to the persons who are more likely to stimulate the economy through production and purchase, from the position of post production outputs and wages.

Now, let's turn our attention to the meat of the matter. The key factor of interest, which differs from previous pre-budget reports, is the fact that these are extraordinary times. While the report also states nifty goals like; environmental commitments, which may have an effect on production and; improving public services, which may work out to cutting the public services. The heart of the matter lie in the stimulus interventions in the macro-economic policy, helping small business and fiscal stability policies for this pre-budget report.

In this first part article, I will look at the "Maintaining macroeconomic stability" chapter and the contents within. I decided to look at the entire pre-budget report in chunks, to get more in and give more particular analyses to the particular components, without appearing too general or looking as if my writing is scattered all over the place, with terms and phrases, which may not compute.

See chapter here: http://www.hm-treasury.gov.uk/d/pbr08_chapter2_228.pdf

From the start---
First off, to me, cutting VAT tax to 15% was a good thing. Cut taxes all day, every day, is my battle cry. However, Britain, as said, is running a huge public deficit--some 550 billion tax receipts to 630 billion expenditure up to now at the end of 2008. That simply is not a type of government deficit Britain can keep up. While cutting the VAT was good and, at the same time, they also raised income taxes and cut allowances for persons making over 100k pounds. While they attempted to bring more relief to the many, this may work out to bringing more inflation to the entire UK--where the poor, would surely suffer in the long run. Also, they are increasing top up benefits, at the same time as well. I would assume they would have to cut public services, at a time where the services are over-bloated, but, a time where folks can't lose their jobs and at a time where labour can't fire them, either. Brown is on the wrong path in this regard. Britain will be in more debt in 2009-2010.

Let's take for instance, in fact, how this policy was said to effect persons. You cut the VAT tax on goods, while Britain is at its highest point in importation of goods. That tax break, will go to a Euro zone and abroad (emerging export markets), while not working towards bringing the country out of debt at all. Also, the persons who make over 100k pounds--the same persons you cut tax allowances for and the ones you raised taxes to 45%-- are the ones who are going to be the innovators of the economy, who would surely boost production and spur creativity. The disincentive to create, while at the same time giving no assurance to you if you were to lose your job in this tough time, is something that was more than a gamble. Unless the companies that export from foreign markets, have a British base and have a credible market share in the UK domestic market for goods, in particular, then, this just boosts foreign markets. Unless you also cut taxes for small business services as well.

Also, another issue to take into account, is the fact that as they raise taxes on high income earners, and, they lowered VAT for all on the assumption that their retail sector would be competitive and the consumer would reap the benefits, have they also taken into account that this may not be the case and in fact more job losses would increase the likelihood of a soft Christmas season? One thing about that is positive, however, and that is that commodity prices worldwide, which affect Britain's consumption through imported goods, are going down--deflation in the prices and the stocks of the companies, to be more specific. This is a chief reason stated as the policy response and one that may work. But, to expect a robust Christmas and a rosy first half of 2009 to take Britain out of the slump is more than optimistic. I am expecting modest global growth for 2009, by only .25%. Also, they have extended the tax breaks on vat into 2010 December. So, there will be allot of spending moving forward hopefully.

I see the VAT cut helping Asian and emerging market stocks who export to Britain, but I don't see Britons getting savings--especially since the persons who you gave a tax rise too--the folks making over 100k-- are more than likely to be the shop keepers, who you are forcing to lower prices at a time where location matters more than "lowest" price. For example, why travel to Essex, paying 5 pounds for the trip, for a shirt costing 20 pounds, when you can travel to Oxford Street with a 2 pound bus ride and a cost on your day trip, and pay for the same shirt which would cost you 21 pounds? While savings is not the target of concern, one could help but raise the point as an issue moving forward.

Speaking of which, travel tax is something that has not been addressed. And, it is something that has gone up in the UK in the last 2 years. This has to be a concern and I for one, would stress it as a major concern. This hits the average consumer in the pocket, more than any other tax; in most cases, it is a tax for work in peak hours and a huge disincentive to travel to shop.

This first piece of the pre-budget, sets the tone for the rest of the report. If we are cutting taxes, we would have to look at the cutting of public services for the deficit. Also, we would have to look at the section for small business growth, in order to see if there are enough provisions in place to offset the rise in taxes for persons making over 100k pounds. Also, to see if those same business taxes, extend to services and not only the goods market. If not for both equally, the UK has simply had Chancellor Darling and Prime Minister Brown, hand them more labour tax and spend policies under the table and in the guise of fiscal stimulus--with more debt to boot and more hand-outs for the unproductive. To top it all off, help the Labour party pay for their election on the cheap with public finances.

Youri
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