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Overview of the U.K. Budget

Overview of the U.K. Budget 1998

This article has been written by Mr. Hiten Shah and Mr. Abhay Bhagat, Chartered Accountants



    Objective   Budget Initiatives   Problems / Challenges

a)

 

Economic Stability

 

Low Inflation [from 4% to 3%]

Sound pubic finances.

Reduce unemployment.

Legislating. Code for fiscal stability.

 

lower GDP growth rate due to financial difficulties in Asia.

boom and bust economy

             

b)

 

Employment

 

encouraging work,

75 pounds a week, employers subsidy for persons unemployed for 2 years or more.

 

unemployment rate higher than most developed economies.

high proportion of low skilled or inactive workers result in skill shortage of pressure on inflation.

             

c)

 

Employment

 

lower interest rate from 7.5% to 6% [lowest in last 33 years]

tax reforms to boost investments and small firms.

lower taxation [Corporate tax, 30% small company 20%]

 

slack, domestic demand.

Exchange rate remains high in trade weighted terms.

Output per head is around 50% higher in US than in UK.

             

d)

 

Fairness

 

Strong Public Services specially education and health.

helping poor people and provide opportunity for all.

reforms in national insurance premium structure.

For first child, child benefit raised to 20%

 

increasing inequality, income shares of bottom 20% household was 6.3% and top 20% was 43% in 199495.

             

e)

 

Achieve Sustaninable rate of growth

 

tough rules for Govt. Spending and borrowing.

encourage savings

aiming balanced budget next year, current year deficit about 2% of national income.

 

introduction of singly currency in 1999, Britain needs to prepare now.

Capital stock, per employee is much lower than other leading economies like Japan, Germany and US.

Research and Development (R&D) fell in UK, relatively lower than almost every other G7 country.

             

f)

 

Protecting Environment

 

Higher tax on petrol and tobacco

   

On the eve of presentation of Indian Budget, it may be interesting to study U.K. Budget, their problems and solutions they applied, considering that many of their problems and challenges are similar to one faced by India.

U.K Budget like Indian Budget is announced by the Chancellor just one month prior to commencement of fiscal year. Fiscal year commences from 6th April and ends of 5th April. Budget is presented around March.

U.K. Budget gives outturn for previous year, estimate for the coming year and forecast for the next year. i.e. previous year plus next two years. For certain sectors like public sector borrowing, public financing, budgetary deficit, GDP growth target projection for next 5 years are given.

The budget gives a very detailed analysis of policy measure taken. Financial deficit was 8.2 billion pounds for 1997-98, now estimated to be 3 billion pounds for 1998-99 and 1999-00 is forecasted to be surplus Budget with surplus of 0.5 bn pounds.

1998 U.K. Budget was presented by Chancellor Mr. Gordon Brown on 17th March who described it as 'New ambitions for Britain', which is expected to turn ambitions of many into achievements'.

U.K. Budget Highlights

1. Mr. Brown's budget contained long advertised `working families tax credit' with subsidies for child care, and a significant reform of national insurance contributions (pay role tax for employees and employees). It provides for an additional sum of pounds 500 ml. For NHS, 250 ml. pounds. For education, 500 ml. pounds for public transport and package for protecting environment. Important achievement was that is spite of these additional spending the personal tax rates remained intact, corporate tax, were marginally reduced. Further the 10% tax relief on mortgage interest rate was untouched, which had been tipped off to scrap.

2. Repeated cycles of boom and bust have been damaging to the US's long term economic performance. To avoid these cycle and achieve sustained economic growth, low inflation and sound public finances were stressed in the budget by Mr. Chancellor. Inflation target confirmed at 2 ½ percent to achieve economic stability. Monetary policy of Bank of England provide for lower interest rate and credible long term policy.

Golden rule announced in July 1997 budget on which Fiscal Policy is based is – "over the economic cycle Government will borrow only to invest and not to fund current spending" and "public debt as a proportion of national income will be held over the economic cycle at a stable and prudent level."

3. Question is how the budget is financed? Big companies are now required to pay corporation tax, quarterly which will bring 1.6 billion. Stamp duty on properties worth more than 2,50,000 pounds is increased from 1.5% to 2% and on properties with more than 5,00,000 pounds is increased from 2.5% to 3%. Higher taxes on petrol and tobacco will also contribute handsomely.

4. U.K. budget provide us with an opportunity to study remedial measures taken for many of their problems which are similar to ours.

U.K. Budget aims at not just the growth but sustainable rate of growth, not just employment but make the work pay, and welfare economy with strong public services specially health and education, at the same time maintaining lower rate of taxes.



U.K. Budgetary       Indian Budgetary    
Resources Resources
1998-99 1997-98



Individual Income-tax 26%   Individual Income-tax 8%
Corporate tax 11%   Corporate tax 8%
Direcxt taxes Total 37%   Direcxt taxes Total 16%
         
Vat 16%      
Excise etc. 11%   Excise etc. 19%
Others 16%   Customs 19%
[Taxes and royalties] 16%      
      Others 22%
Social Insurance Receipt 16%   Internal Borrowings 23%
Other Receipts 4%   (including PPF, NSC etc.)  
Borrowings not shown as part of Budget receipts (13.3 bn.)     External Borrowings 1%
  100%     100%
         
Source : Budget presented in July, 1997     Source : Second Budget presented in 1997 by Finance Minister Mr. Chidambaram.  
 
  Billions Pounds     Billions Pounds Bn.
Rs.
Receipts 332.5   Total Receipts 42 1666
      (including loans)    
Outlays 330.1   Total expenditure 58 2321
Reserve --   Fiscal deficit 16 655
Fiscal deficit 2.4   GDP   13514
GDP 833.6        

Note :
Both governments have widely differing accounting policies and assumptions. Hence the two sides are not strictly comparable. This table only gives a rough idea of the comparision.