Finance Matters

Posts Tagged ‘Economy News’

The UK economy is expected to contract by 0.4 per cent on an annualised basis in the first three months of 2012, according to the Organisation for Economic Co-operation and Development (OECD).

This represents a contraction of 0.1 per cent compared with the final quarter of 2011 and means that the UK is returning to recession.

UK output declined at an annual rate of 1.2 per cent in the final quarter of 2011, according to the OECD, a Paris-based think tank which promotes policies that improve people’s economic and social well-being.

The organisation expects the UK to be the second slowest economy to recover in the first half of 2012, with only Italy taking longer to return to growth.

In contrast Germany and France will grow at a significantly faster pace than the UK in the 2012 first half, but their growth will slow down as the year ends.

Figures from the Office for National Statistics were also pessimistic, showing UK output falling by 0.3 per cent in the final quarter of 2011, rather than 0.2 per cent as previously estimated.

Shadow chancellor Ed Balls is urging the government to slow down its programme of spending cuts and tax increases, action which the OECD suggested in 2011 in order to combat slower than expected growth.

The OECD has also highlighted an increasing gap between European and North American economies and is calling on policy makers to continue their efforts to sustain recovery.

Pier Carlo Padoan, the OECD’s chief economist, said: “Substantial risks remain in the euro area

“Confidence is low, [bond] yields remain high and lending activity has weakened recently.

“So in spite of positive action [from the European Central Bank], more needs to be done to boost growth and sustain the recovery.”

Delivering his third Budget, Chancellor of the Exchequer George Osborne, said that it would help those who aspired to do better for themselves and for their families.

‘Britain is going to earn its way in the world’ he said.

He promised far reaching tax reform, creating a system that was simple to understand for ordinary taxpayers and more competitive for business.

More specifically, the Chancellor confirmed the news leaked yesterday that the 50p top rate of income tax, which is paid on earnings over £150,000, will be cut to 45p from April 2013.

Other taxes on wealth will be introduced and along with measures to curb tax avoidance, these are expected to raise five times as much as the 50p tax rate.

The top rate had been expected to raise £3bn, but it has raised just a third of the expected amount and is believed to reduce competitiveness.

For low-earners, the Chancellor announced an increase in the income tax allowance to £9,205.

Mr Osborne revealed positive news on the economy, with a slight increase in the growth forecast for the UK economy this year from 0.7% to 0.8%

However 2 per cent growth is expected in 2013, slightly lower than earlier forecasts of 2.1 per cent.

The Chancellor announced that the government is on schedule to reduce the UK’s deficit by 2016/17 and that the Independent Office for Budget Responsibility believes the country will avoid a ‘technical recession’.

There will be a larger than expected cut in corporation tax to 22p over the next three years, to help attract foreign investors.

Prior to the Budget, the Office for National Statistics revealed that Britain’s budget deficit almost doubled in February to £15.2 billion due to lower tax receipts and an 8.3 per cent increase in spending.

The latest official figures from the Office for National Statistics (ONS) show that inflation fell to 3.4 per cent in February, from 3.6 per cent in the previous month, according to the Consumer Prices Index (CPI).

Using the Retail Prices Index (RIP) measurement, which includes housing costs such a mortgage interest and council tax, inflation fell to 3.7 per cent from 3.9 per cent.

The lower inflation figures reflect a reduction in domestic heating costs in February compared with a year ago, and continue a downward trend which started in September.

All six of the UK’s main energy companies have reduced their prices, while discounting on digital cameras and a 1.6 per fall in air fares also helped to lower the CPI rate of inflation in February.

The CPI rate is now at its lowest level since November 2010, but it is still above the Bank of England’s target of 2 per cent.

However, there is optimism that it could hit the target by the end of the year unless oil prices continue to rise.

Ongoing difficulties in Iran and Syria have prompted discussions between President Barack Obama and Prime Minister David Cameron about releasing strategic oil reserves to keep the price of oil down.

While the fall in inflation is good news for consumers, many will have noticed little effect on their spending power as ONS figures also revealed a fall in average earnings growth from 1.9 per cent to 1.4 per cent annually.

There was also good news on the economy earlier this month, when the National Institute of Economic and Social Research (NIESR) revealed that UK gross domestic product grew 0.1 percent in the three months to March.

In the previous three month period the economy contracted by 0.2 per cent.

In a statement, NIESR said: “At present the UK economy can best be described as ‘flat’.

“We expect the UK’s economic recovery to take hold in 2013.”

The Family and Parenting Institute has called on the Chancellor to avoid delivering a ‘Break-Up Budget’ on Wednesday.

The charity, which aims to make the UK a better place for families and children, fears that a budget which puts family incomes under further pressure could threaten family life.

The divorce rate in England and Wales increased by almost 5% in 2010, the first time it has increased for eight years, and with financial pressures shown to increase conflicts in families, experts pointed to the UK’s austerity measures as a causative factor.

Dr Katherine Rake, Chief Executive of the Family and Parenting Institute, said: “Families are deeply anxious over the government’s austerity programme.

“They are being hit by a raft of painful measures, including changes to tax credits, the scrapping of the Child Trust Fund, the end of universal Child Benefit, and the proposed housing cap.”

A report by the Institute for Fiscal Studies, commissioned by the Family and Parenting Institute, found that the average family with children faces a 4.2 per cent fall in income by 2015/16.

This represents an annual income drop of £1,250 for a couple with two children.

In comparison, a couple without children will see a reduction in annual income of just £215.

A Treasury spokeswoman said: “If the deficit is not tackled now, the impact on families will be worse.”

At the other end of the scale, The Telegraph revealed today that the Chancellor will reduce top rate of tax from 50p to 45p in Wednesday’s budget.

The Chancellor is expected to report that the 50p tax rate is damaging the UK’s economy by deterring investors and entrepreneurs.

The 45p rate will be introduced in April 2013, and is expected to raise more money for government coffers than the higher rate, because fewer people will avoid paying it.

The question of whether or not to scrap the 50p income tax rate is dividing the coalition government in the run up to the budget on 21 March.

Chancellor of the Exchequer George Osborne is determined to reduce income tax on earnings over £150,000, but the proposal has been met with disapproval by Lib Dem leader Nick Clegg.

The 50p rate was introduced by Gordon Brown’s Labour government in 2010 as a way of boosting government revenues during the recession.

Mr Osborne insists it was meant to be a temporary measure and is seeking clarification on how much it is actually raising in tax.

The 50p rate has been criticised for deterring entrepreneurship and investment.

Deputy PM Nick Clegg previously said that scrapping the 50p rate could destroy public support, but the Lib Dem’s position seems to have shifted slightly.

The party is now saying that it is not ‘ideologically wedded’ to keeping the 50p rate as long as it is replaced with another tax on wealth.

Suggestions include a tax on properties worth more than £2m, or a new ‘super’ council tax band for high-value properties.

Mr Clegg is also pushing for the income tax personal allowance to be raised more quickly than planned, to help low-income households.

The leaders must resolve the issue quickly so that the Office for Budget Responsibility has the information in time to make its economic forecasts.

The run up to the budget has also seen business leaders criticise the Government’s growth plans.

Speaking at the British Chambers of Commerce conference Willie Walsh, chief executive of International Airlines Group, said that the coalition government changed its policy for growth “every other week”.

At the same conference Stephen Hester, chief executive of the Royal Bank of Scotland, said that companies in the UK lack the confidence to invest and called for a ‘circuit-breaker’ to restore confidence.