UK Economy: Encouraging signs but more tough decisions await

By Neil Kennard

George Osborne has maintained throughout the lifetime of this Parliament that the government needs to spend less and get borrowing down through an eight-year austerity programme. Amongst the figures being mentioned at the moment there are some that seem to indicate the coalition is achieving some reductions, with monthly borrowing in May falling from £15.6bn to £12.7bn. But, there is also news just out that the underlying public sector borrowing for 2011-12 has gone up from £118.5bn to £118.8bn, an increase of £0.3bn, and the public sectors net debt has increased from £1.1tn to £1.19tn. With these figures, Treasury Minister David Gauke MP admitted the government has “still got an issue with our deficit”. The Parliamentary Opposition have been swift to jump on these figures, Chris Leslie MP, Labour’s shadow financial secretary to the Treasury is quoted as saying, “with borrowing now confirmed as rising last year, these figures are another damaging blow to George Osborne’s economic credibility”.

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Another source of income for HMRC comes from a new windfall tax from Swiss Banks, who agreed to settle the tax affairs of British citizens, massing £3.2bn. The agreement signed with Swiss authorities in January, took the funds from accounts held by UK residents that were undeclared but still liable for taxation to UK authorities. This deal comes amongst other agreements with our European partners, and at the G8 table, to really start tackling the few remaining tax havens that facilitate tax evasion and avoidance, of which some UK’s Overseas Territories’ are included: British Virgin Islands (BVI), Cayman Islands, Bermuda, Gibraltar, Anguilla and Turks and Caicos, together with the Crown Dependencies of the Isle of Man, Jersey and Guernsey.

As these collaborations and pledges take hold, governments around the world will hope to see more revenue in the form of tax, and given the severity of the debt still hanging over many countries such as the UK, this money will be vital in helping to reduce the debt in face of the slight rise in borrowing figures. The government’s tax plan was further boosted by a scheduled £3.9bn cash transfer from Swiss banks under a controversial deal last year to return interest payments on the BoE’s massively increased gilt holdings to the government. And at present, analysts currently project that the government will meet its 2013/14 goal of borrowing no more than £120bn; but this road will still not be easy.

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When these figures are considered in line with current inflation and the still low levels of growth on the UK economy, it can be seen as somewhat of an achievement in securing a relative stabilisation of the debt in real terms. Real debt reductions will only be feasibly achieved when reductions in public spending meet real growth in the economy. This task is made ever harder with next week’s spending review needing to find a further £11.5bn in savings from government departments in 2015-16, in addition to those outlined in the 2010 review, and in face of ever steepening resistance from Whitehall departments that have already seen dramatic cuts to their budgets.

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