Britain's Austerity Program

Britain’
s
Austerity
HELL? Program CURSE
?
GAN Hui Yu | GENG Alexander | HUANG Jieying | LEONG Edwin Chang Sheng | TAN
Outline of
Presentation
Britain ’ s Economic Background
Fiscal Policy : Austerity Program
Debate : Austerity vs . Stimulus?
Will Britain Face a Double Dip Recession?
Is Austerity the right medicine prescribed to
Britain?
Would there be an Austerity overdose?
Monetary Policy
Conclusion
11/26/10 Britain’s Austerity Program 2

Britain ’ s Economic Situation
leading up to Austerity Program

Britain ’ s economic situation
leading up to the Austerity
Program

Rising Public Sector
Debt
Pre - Crisis Years in
Britain :
Property Unsustainable profits & remuneration

Boom in financial sectorRapid growth in tax re
sector spending plans based on these unsustainable

Rising Public Sector
Debt

Unsustainable levels of Private
Sector Debt
Household saving ratio : lowest level
Household debt: 100% of G
Companies debt: 110% of G

Financial Crisis
system has become one of the most highly leveraged
in particularly vulnerable to financial instability
Hit hard by the financial crisis :

Loss of confidence and withdrawal of credit
Pattern of unbalanced
growth
1997 to 2007: Government consumption increased from 18 % to
 Recession: Government consumption accounting for 23 . 5 % of
1997 to 2007: Business investment fell from 11 . 75 % to 10 % o
 Recession: Business investment falling more than 25% to 8 . 25 %

To overcome the fiscal & economic
challenges …
Saving Investment Enterprise
Restoring the economy to :

Sustainable , Balanced & Private - sector led growth

Britain ’ s Austerity
Program
Increases in individual
Decrease intaxes
government expenditure
Cuts in welfare
Encouraging
benefitsgrowth in enterprises

Individual Taxes
Value Added Tax ( VAT ):

Increase main rate from 17.5% to 20%, from January 201
Payroll taxes for employees :

Rise by 1 percentage point from
April 2011
Insurance Premium Tax :

Increase standard rate to 6% and higher rate to 20% f

Financial Sector
Levy on banks ’ balance sheets :

Intended to encourage banks to move to less risky funding pr
Financial Activities Tax :

Planned tax on bank profits
and remuneration

Public Sector
Reduction in Departmental Expenditure Limit
Review & re-approval of significant items of spending inheri
A two year pay freeze for public sector workforce
Ministry of Defense plans to cut 10% of budget over four y

Welfare
Restrictions in Tax credits policies
Reduction in Maternity benefits & Child Benefits
Plans to remove cap in university fees: May double u

Enterprise
Corporation Tax :
Sequential decrease from current 28% to 24% in 2015
Enterprise Capital Fund :

Introduction of fund providing additional equity finance of
Enterprise Finance Guarantee :

Increase to provide £200m in additional lending for SMEs

Austerity vs .
Stimulus
The argument behind
Austerity
Cut budget deficit to ensure long - term sust
•Restore confidence amongst investors

•Support a balanced recovery

Opponent s of Austerity –
Keynesian Theory
“ The boom , not the slump , is the right time
for austerity ”
Removing spending from the economy will

reduce levels of aggregate demand and
contract the economy
Threat of global stagnation pointed out

at the G20 Toronto summit
Downward spiral might potentially hit

the economies that experience deflation

Keynesian Theory
for austerity ”

Keynesian Theory
for austerity ”
Eventually Cut back on

Reluctance of businesses t
deficit spending
triggered a
downturn

The argument behind Stimulus –
Keynesian Theory
Weak private demand.
Low business confidence.
What can we do?
We need to maintain the total level of spending and output to rein

The argument behind Stimulus –
Keynesian Theory
Government stimulus program can drive up aggregate dema
Job Creation: Multiplier Effect:

Higher employment Economic growth
Expanded Economy 
Deficit will self - correct to pre - recession

Proponents of Austerity –
Keynesian Theory Myth
nment stimulus program can drive up aggregate demand

nment stimulus program can drive up Unless
aggregate demand
country is not loaded with excessiv

Multiplier effect:
Economic Growth
Equivalence of public and

private spending
- Ricardo -

Multiplier effect:
Economic Growth Japan and its years of deflationary s
Equivalence of public and

private spending
- Ricardo -

Will Britain Face a Double Dip
Recession?
11 /26 /10 Britain’s Austerity Program 28

Case Study : Britain after
World War II
National Debt as a
Percentage of GDP

U . K . GDP History

Predictors of a
Recession

Yield Curve for U . K .
Yield Curves
Gilts

U . K . Unemployment
Unemployment Rate
Rate

Index of Leading Indicators
U . K . LEI

Average House Prices
Asset Prices
in U . K .

Development of FTSE
Asset Prices
100

Debt Levels
Interesting Facts
£200 a day £57 , 737
Average house price drop in Average household debt
September 2010
£180m
£38 . 06m Personal interest paid in UK
Daily write - offs of loans by daily
banks & building societies
every 14 minutes
1 , 567 people A property is repossessed
Made redundant daily
every 3 . 78 minutes
821 , 000 Someone will be declared
Unemployed for > 12 month insolvent or bankrupt
9 , 000 £357 , 500 , 000

Number of new debt problems Daily increase in Government
dealt with by CAB each day national debt ( PSDN )

U . K . Personal Debt
Debt Levels
Levels
Total Secured
Lending
Total Other Consumer Credit Lend
Total Credit Card

Lending

Is Britain Facing a
Double Dip
Recession?
11 /26 /10 Britain’s Austerity Program 39

Economic Objectives of
Britain ’ s Austerity Program
Rebuild and Reinforce market confidence in British
In the long run, British government wants to restore ec

Main Debates of Austerity
in Britain
lbestimulus
a austerity
or fiscal
overdose?
austerity
Is fiscal
be the
austerity
right medicine
being implemented
prescribedtoo
to

Would fiscal austerity or
fiscal stimulus be the right
medicine prescribed to
Britain?
Fiscal Austerity.

Britain?
Fear
hed into people’s mind. It has been compounded from the collapse of the fi
Britain has the highest amount of debt among the Group 7 nations

Britain?
“a credible fiscal-consolidation plan will

restore confidence and foster economic
recovery”
ed securities such that the interest rates in Britain has fallen below th

Britain?
Ineffectiveness of stimulus measure
a new atmosphere of frugality in Britain. Fall of personal debt from $2.
In 2009, Gordon Brown cut the VAT tax from 17.5%
Japan

Britain?
Fiscal Austerity

Would there be an austerity
overdose? Is fiscal austerity
being implemented too severely?
What is considered an austerity overdo
government cuts its spending so severely that it does not signal confid


For now, no overdose.

Public seems to be taking this bitter medicine with
s reported that top business leaders in Britain support and a

r now, Britain has made a painful but wise decision to apply austerity.
he short run, Britain’s economy may contract and there would be job losses
ng run, austerity may be able to bring about the desired confidence and e

BRITAIN ’ S MONETARY POLICY

Britain ’ s Monetary
Policy
Britain’s use
•
of a monetary
policy to
soften the blow
of the
austerity
program

Policy : Quantitative
Easing ( QE )

Impact of QE on Britain's
Currency

Impact of QE on Britain ’ s
Net Export
Ideally QE could
•
QE Implemented
boost UK net
exports
•
In Britain’s case,
•
impact of QE is
not very
significant:
•
Competitive
•
devaluation
measures are
widely used
•
Exports are
•
increasing at a
lower rate than
imports
Evaluating
Effectiveness :
Policy
Britain’s monetary policy has not attained its much-desired results

CONCLUSION

Short - Term Effectiveness of
Britain's Fiscal and
Monetary Policies
Fiscal
•
consolidation
reduces AD
• Price
Low interest rate
• Level
and QE aims to AS0
increase AD but
unable to offset
the decline in the
GDP
•
Stand: AD is
•
unlikely to improve AD1 AD0

significantly in AD2
the short-term due
to decline in Real GDP
consumer spending

Britain ’ s Austerity
Program

Britain ’ s Inflation
Rate
CPI annual
•
inflation was
3.1% in
September
•
Clothing and
•
footwear prices
rose by 6.4 %
•
Food has the

•
largest upward
effect

Britain's Unemployment
Rate
Highest since
•
1992

Stimulus vs
Austerity
Austerity
•
Program likely
to attain its
impact in the
long-term
•
Required to
•
attain the much

needed budget
deficit
reduction

Future Plans to Embark
On : Britain

£200bn National
Infrastructure Plan

In Consequent ,
•Britain should not

abandon its Austerity
Program too early.
•
It should only move on

•
to expansionary fiscal
policy when it has
attained some success in
the private-sector led
recovery and/or
increased its private
savings.

THE END

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Britain’

11/26/10 Britain’s Austerity Program 2

11/26/10 Britain’s Austerity Program 3

11/26/10 Britain’s Austerity Program 4

Property Unsustainable profits & remuneration

sector spending plans based on these unsustainable

11/26/10 Britain’s Austerity Program 5

11/26/10 Britain’s Austerity Program 6

Household saving ratio : lowest level

Household debt: 100% of G

Companies debt: 110% of G

11/26/10 Britain’s Austerity Program 7

system has become one of the most highly leveraged

in particularly vulnerable to financial instability

Hit hard by the financial crisis :

 Recession: Government consumption accounting for 23 . 5 % of

1997 to 2007: Business investment fell from 11 . 75 % to 10 % o

 Recession: Business investment falling more than 25% to 8 . 25 %

11/26/10 Britain’s Austerity Program 9

Saving Investment Enterprise

Restoring the economy to :

11/26/10 Britain’s Austerity Program 10

11/26/10 Britain’s Austerity Program 11

Value Added Tax ( VAT ):

Payroll taxes for employees :

Insurance Premium Tax :

11/26/10 Britain’s Austerity Program 12

Levy on banks ’ balance sheets :

Financial Activities Tax :

11/26/10 Britain’s Austerity Program 13

Reduction in Departmental Expenditure Limit

Review & re-approval of significant items of spending inheri

A two year pay freeze for public sector workforce

Ministry of Defense plans to cut 10% of budget over four y

11/26/10 Britain’s Austerity Program 14

Restrictions in Tax credits policies

Reduction in Maternity benefits & Child Benefits

Plans to remove cap in university fees: May double u

11/26/10 Britain’s Austerity Program 15

Enterprise Capital Fund :

Enterprise Finance Guarantee :

11/26/10 Britain’s Austerity Program 16

Cut budget deficit to ensure long - term sust

•Restore confidence amongst investors

11/26/10 Britain’s Austerity Program 18

Removing spending from the economy will

Threat of global stagnation pointed out

Downward spiral might potentially hit

11/26/10 Britain’s Austerity Program 19

11/26/10 Britain’s Austerity Program 20

Eventually Cut back on

11/26/10 Britain’s Austerity Program 21

We need to maintain the total level of spending and output to rein

11/26/10 Britain’s Austerity Program 22

Job Creation: Multiplier Effect:

11/26/10 Britain’s Austerity Program 23

11/26/10 Britain’s Austerity Program 24

11/26/10 Britain’s Austerity Program 25

Equivalence of public and

11/26/10 Britain’s Austerity Program 26

Equivalence of public and

11/26/10 Britain’s Austerity Program 27

11 /26 /10 Britain’s Austerity Program 28

Britain's Austerity Program

Britain's Austerity Program