Friday, 6 May 2011

COMMENT: A stagnant economy?

Source: Treasury

The announced cuts and the increase of the taxes are trying to boost the British economy, which now face the hard task of overcoming the hangover left by the deep financial crisis that hit the whole world in 2008. However, Chancellor of the Exchequer, George Osborne, also was forced to announce that despite the reforms and the cuts the 2011 growth forecast for the British economy will be downgraded from 2.1% to 1.7%. Similarly, the forecast for the following year, 2012, will decrease from 2.6% to 2.5%. Finally, the economic forecasts point out that inflation will remain between 4% and 5% in 2011, and will fall to 2.5% in the following year.

The aggressive cuts announced by the British Government will affect various key sectors. The good news is that concerning fuel, the duty is being cut by 1p per litre, and the planned inflation rise in fuel duty, scheduled for last April, was delayed until 2012. These measures will be covered by an extra £2 billion tax applied to the main oil firms present in the North Sea. However, the VAT on fuel will not be reduced. Concerning other key products, the Government won’t reform the planned rises in alcohol and tobacco tax, of 4p on a pint of beer and 15p on a bottle of wine.

Regarding the borrowing, the forecast is £146 billion for this year, £2.5 billion lower than expected. Osborne forecasted that the borrowing will fall to £122 billion in 2012 and £29 billion by 2015-2016. The national debt forecast for this year will reach the 60% of national income, rise to 71% in 2012 and finally fall to 69% by 2015.

Source: Treasury

Is the British economy facing a real threat of stagnation?

All these measures aim at reforming the badly-hit British economy but, will they be enough? Most business groups hailed the Budget, and agreed that would create new jobs, but there are fears among the oil and gas producers, who argue that the £2 billion tax in oil companies will damage a key sector in the UK. On the other hand, the Institute of Fiscal Studies calculated a loss of £200 per household on average after the announced measures were finally applied, last April.

The new measures are regarded as little adjustments that won’t fix the whole problem in the British economy. They are seen as a plan that hopes for growth, rather than an actual plan designed to boost economic growth.

Source: Treasury

Wales, the poorest region in the UK

Wales eyes the Budget with hopes and fears. The planned extra £65 million over the next five years is good for the Welsh economy, yet it fails to balance the negative impact of the announced cuts in the region. Wales is currently the smallest economy of the whole United Kingdom, with an average GDP of less than half as that of London.

Wales also faces the problem of big unemployment rates, the highest of the whole country, peaking at 9%, some 126,000. It is obviously becoming a very worrying problem, and the cuts announced in the previous Budget won’t do any good to it.

The words of Plaid Cymru’s MP, Jonathan Edward, make it clear: “The truth is that the UK Government has no plan B for Wales, and worryingly there is a very real threat of a decade of economic stagnation”.

Yet an extra £65 million over the next five years, including up to £34 million in 2012 is a gift that Wales has to embrace. Yes, it fails to relieve the Welsh economy, but still, it is equivalent to a 0.1% increase in the Assembly Government’s resources. And we see it as the stepping Stone for the recovery of the Welsh economy.

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