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Wednesday, 12 March 2008

Budget 2008 – how to make a financial crisis seem dull

Today saw the announcement of Alistair Darling’s first budget. Not the most interesting budget because the Chancellor had little room to manoeuvre. On the one hand, the government is becoming increasingly unpopular which is stopping them from making any major steps towards raising taxes. On the other hand, the Treasury has overspent in previous years, which has reduced their ability to increase spending now the economy is entering a period of slower growth – and could really do with a little help from the Government.

One major announcement was that the 2008 GDP growth forecast for the UK was revised down by 0.25% to between 1.75% and 2.25% in today’s budget. This still looks like a very high estimate given that the survey of independent forecasts, as mentioned on page 169 of the Red Book, presents forecasts that range from between -0.1% to 2.1% and average of 1.7% in 2008. Independent forecasts are also in a period of being downwardly corrected by many banks and consultancies. As the year continues the Treasury forecasts are likely to look increasingly unrealistic.

Other measures that will impact upon work and working life:

• Income tax changes confirmed for April. Basic rate drops from 22 per cent to 20 per cent and the 10 per cent band is abolished.

• New charge on non-domiciled residents to be introduced from April and won’t change during this parliament, and next if Labour remain in power.

• Public sector employment has fallen in the past year; private sector employment risen.

• Around £60m to be spent over the next three years to encourage people to move into work and to move up the employment ladder.

• Spend of £10m over the next five years to create a new science fund for teachers in secondary schools.

• Increase in the amount of funding for adult training. Investment of £200m in poorly performing schools to try and improve GCSE grades by 2011.

• Long-term sick to attend “work capability assessments” from April 2010.

• New contract to help parents into work involving a commitment to find employment. Benefits for working families will be boosted.

• Child benefit will be up to £20 per week for the first child in 2009, a year earlier than planned. Child element of child tax credit to be raised by £50 above inflation a year.

• Tax-exempt limits on individual savings accounts increased to £7,200 a year for standard accounts and to £3,600 a year for cash accounts.

• Launch of a “savings gateway” in 2010 to encourage people to invest.

…and worst of all:

• Beer duty to increase by 4p per pint, wine up 14p a bottle, cider up 3p a bottle and spirits up 55p a bottle.

Increasing taxation on alcohol and large cars were the only areas the Chancellor could get away with any major increases in taxation. With all the fuss about “binge” drinking and anti-social behavior the Treasury has decided to take advantage of this situation, increasing the duty on alcohol by 6% above inflation. This has been welcomed by the British Medical Association, but has raised concerns from breweries that sales will fall and more pubs will continue to shut.

It is unlikely that the Chancellor was too worried about the health benefits of high taxes on alcohol, and was more interested in the raising revenue, but perhaps that’s just the cynical views of a man who likes a pint.

All in all this was an uneventful budget that will not be widely remembered. The key things to take from this are: the government are likely to have got their sums wrong; there have been some moves towards reducing child poverty; there has been some simplification of the tax system (a good thing but could go further); and if you smoke, drive a big car and like to drink then the government thinks you are a bad person and wants you to pay for it.

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Wednesday, 3 October 2007

Election time – unnecessary and bad for the jobs market.

Although we don’t know yet whether Gordon Brown will call an election to take place next month, it is becoming increasingly likely given the Labour Parties extensive leads in the polls. Gordon Brown doesn’t need to call an election until 2010 but it seems that he believes by calling it now he will be able to increase his majority and gain a mandate to rule.

Given the outlook for the economy this is probably the best time for Gordon to call an election. Although early signs of the economic slow down is starting to show in the crisis at Northern Rock, slowing house price growth and the loss of jobs in the City of London this has not yet had a significant impact upon the wider economy. As such, Gordon Brown, whose legacy is intrinsically entwined with the economy, is likely to face heavy criticism should the economic environment turn sour.

So what is the likely impact of an election on the labour market?

In the short term the election is unlikely to be good for the jobs market. Political uncertainty is never good for business investment and planning and as a result businesses will tend to slow their expenditure and put back decisions until after the election. Although this has a bigger effect in countries where the political divide is greater, such as France, it will have an impact, especially given the current economic environment of financial uncertainty.

In the longer term the outcome of the election will help to decide the impact on employment market. One risk is that the election will result in a hung parliament. If this is the case then the result could be political paralysis. The Liberal Democrats will eventually provide the support so a government can be formed, however, the decision making process will be significantly slower. Therefore if problems such as the current credit crunch start to have a much wider and deeper impact on the economy, the government of the day would be less able to act decisively to stem the decline. Again this situation adds to risk and uncertainty, making business less willing to invest in the United Kingdom, keeping their money in the bank or sending it elsewhere.

If either the Conservative Party or the Labour Party is elected with a majority then the outlook for the jobs market will be much better. (In my opinion this is a good case for the first past the post system, but that’s beside the point). Having a party that can act decisively reduces economic risk.

Both of the parties have relatively similar policies when it comes to the jobs market. Neither is proposing a massive hike in taxes, as the Liberal Democrats are, which would harm the economy as the highly skilled and the high net worth, which support and create jobs leave the country or become tax exiles.

The Conservative Party in the long term is likely to reduce the number of people that work in the public sector. Therefore as a result if you currently or looking to work in this sector, then your employment prospects might be diminished. Nevertheless this is not entirely a bad thing. If the reduction in public sector employment leads to lower taxation then this should stimulate economic growth as people have more money in their pockets to spend on other sectors in the economy.

Public sector employment also acts as a barrier to private sector employment. The public sector usurps markets and skilled employees from the private sector, and as a result hinders the growth of this sector. Without the hindrance of profit requirements and short-term cash flow needs the public sector can continue to operate despite its lower productivity compared to the private sector. Therefore, a slowing of public sector employment growth should help the private sector to flourish as it replaces the public sector. This private sector employment is likely to be of higher productivity with greater returns, which in turn will help to boost employment in the wider economy.

The outcome of the election is not a done deal, but nor is the outcome for the jobs market. There currently exists plenty of risk in the economy and the uncertainty of an election in both the short and the long-terms may act to unsettle to economy further. This election is a purely political act, as in many ways is not in the national interest, and could further weaken employment prospects.

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