Monday, 8 February 2010

UK economic gloom ahead

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What will happen in 2010 to the UK economy? The £200bn injection from 'quantiative easing' will come to an end and the size of the budget deficit will force which ever political party who is in power, to begin to make real cuts in public spending. So can the Government repay its huge debt caused by bailing out the banks? For a down to earth and personal view the Five Pence Piece website is a good starter for ten for predictions.

Markets are worried and hate the uncertainty of what the future holds. Labour says it will halve capital spending (that could be stopping schools and hospitals being built). The intention is to find £100bn from somewhere over the next 4 years:-

  • £25bn is forecast from growth, which is always questionable.
  • £20bn from reducing the capital expenditure by a whopping 50%.
  • £20bn of tax hikes have been already announced, prior to an election, so it is highly likely the real figure will be much higher. 
  • £10bn saved on public sector pay, which will inevitably mean strikes and damaging effects to public services.
But that still leaves a gap of around £25bn, which can only be filled by further tax rises probably on VAT. That could mean that after we have seen the temporary VAT cut end pushing the rate back to 17.5%, it could now be pushed higher to 20 or even 25% depending on the shortfall. To understand the different VAT rates and how they are currently applied, HM Inland Revenue and Customs have a guide.

Other countries are in real trouble too with Greece's 'credit rating' (for its size of debt) being downgraded after running a deficit worth about 15% of GDP, Ukraine refused a loan and Iceland, Ireland and others are in trouble. There are even whispers that the Euro will come under pressure as members are in real trouble.

It seems the experts are uncertain (as usual) about predicting the UK future as they are with the international future. Most seem to be saying that we have to wait for the summer, post the election, before we can see what the UK plan of action will be and the latest economic statistics to give us indicators for whether we face the dreaded double dip recession.

With public sector workers finding their stand of living dropping, inflation rising and unemployment rising to over 2 million, the UK society will face tough problems, which may lead to confrontations on the streets and repeated strikes. The signs are ominous for the way the economy recovers. It may well be a slow, patchy recovery with many people losing out and feeling the pain. That pain will continue to be felt for the next generation, whether it is paying off the debt or a new deprived class of people growing up in poverty with all the old social ills that go with it.
These are graphs showing the working age employment rate and the unemployment rate
With the headlines being taken by the economy and strong criticism for the science behind climate change, I fear that post-Copenhagen, the political will to seize the chance to make a real difference to our declining climate will be missed. Trying to argue for costly environmental remedies will not sit easily with an electorate that is concerned with paying the mortgage and putting food on the table. The quality of the science must continue to be robust and loud, if it is not to be drowned out by the tidal wave of economic gloom ahead.

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