Budget 2010: a beginner's guide to Britain's debt

Budget 2010: a beginner's guide to Britain's debt

The scale of Britain's debt is why George Osborne is delivering an emergency Budget. Here's an expert lowdown on the state Britain is in.

By George Buckley, UK economist at Deutsche Bank

Published: 1:10PM BST 16 Jun 2010


WHAT IS BRITAIN'S DEBT POSITION AND HOW DID IT BUILD UP?


Of all the most highly-rated countries in the world, the UK government's debt position has deteriorated the quickest over the past two years. The government now owes about 70pc of the UK's total annual output, and this figure will rise further over the coming years. The new government is likely to announce drastic measures to address the situation in Tuesday's Budget, but it will take time to stop debt from rising.

IS IT BRITAIN'S HOUSEHOLDS THAT ARE MOST IN DEBT?


The two parts of the economy with the most debt are the government and households. The failure to save in the good times along with the credit crisis, bank bail-outs and the ensuing recession can be blamed for the rise in government debt. The surge in household debt can be attribued largely to higher house prices over the past 15 years. People have had to borrow more as house price increases have outstripped the rate at which they were able to build up savings. Following the recession people have borrowed less, but the process of reducing debt will take time.


WHAT ARE THE DIFFERENT WAYS OF MEASURING BRITAIN'S DEBT?


While the budget deficit is the amount which the government borrows in any one year, it is also important to look at the level of debt. This is the total amount that the government owes because of all of its current and previous borrowing. There are two main measures of debt - gross and net. Gross debt is the total amount of outstanding loans, while net debt takes off the financial assets that the government owns. These figures are reported in a similar to way to borrowing - in other words both in money terms and as a percent of GDP. Currently, gross debt stands at over £1trillion, which is more than 70pc of GDP.


HOW DOES BRITAIN'S DEBT POSITION COMPARE WITH OTHER MAJOR COUNTRIES?


Fortunately, government debt was low (relative to other developed countries) prior to the credit crisis, so we can at least be thankful for that. Debt should therefore settle at a level lower than the average of the G7 countries by the end of this parliament. Debt will be lower than countries such as Italy and Japan, which owe much more relative to the size of their economy than the UK does. But it will probably be higher than Canda and even Spain over the next few years.


WHAT'S THE STRUCTURAL DEFICIT?


The structural deficit is that part of the total shortfall between government receipts and spending that can't be explained by weaker economic growth. When strong economic growth returns, it is the level of the deficit that still remains. The way that this must be tackled therefore is to introduce measures to reduce spending, such as the £6bn of cuts already announced, and/or raise taxes, such as increasing the rate of VAT or capital gains tax.


WHAT'S THE DANGER IF THE DEFICIT ISN'T TACKLED?


The euro area is in crisis because of its huge deficits. A combination of recession and banking sector bail-outs has meant increased government borrowing, with the result that investors have been worried that some countries may not be able to pay them back. In turn, they have demanded a higher rate of interest to compensate them for the increased risk involved in lending governments their money. This is how it can become a viscous cycle - because when interest rates rise it becomes more difficult to pay. The government must therefore address the situation to ensure that the nation's debt is sustainable.


http://www.telegraph.co.uk/finance/financetopics/budget/7831122/Budget-2010-a-beginners-guide-to-Britains-debt.html

Alistair Darling unveils 50 per cent tax rate in UK Budget 2009

Alistair Darling unveils 50 per cent tax rate in Budget 2009

A new 50 per cent top rate of income tax has been announced in the Budget by Alistair Darling, the Chancellor.

By Jon Swaine and Angela Monaghan
Last Updated: 1:43PM BST 22 Apr 2009


The rate will apply to earnings above £150,000 and will replace the 45 per cent rate unveiled in the pre-Budget Report last November. It will take effect from next April - a year earlier than had been planned for the 45p rate.

Personal allowances will also be fully withdrawn for those with incomes over £100,000 from next April.


Tax relief will be reduced on pensions earnings above £150,000, Mr Darling added. However, the basic state pension and the Winter fuel allowance will both continue to rise.

The decisions came as Mr Darling announced the most important budget for a generation, aimed at tackling the worst recession since the Second World War.

Outlining the scale of the problem, Mr Darling announced that he expects that the economy will contract by about 1.6 per cent during the first quarter of this year, and that GDP growth will be about -3.5 per cent for the year.

The recession has forced the Chancellor to rip up his economic forecasts made in the Pre-Budget Report in November, in which the economy was expected to contract by just 1.25 per cent.

In contrast to more pessmistic forecasts from the City, Mr Darling said that he expected the economy to start growing again towards the end of this year, before growing by about 1.25 per cent in 2010 and 3.5 per cent in 2011.

The Chancellor also admitted that Government borrowing will soar to £175bn in the current financial year, or 12 per cent of the country's gross domestic product. The recession has torn a hole through Britain's public finances as tax receipts collapse and spending on benefits such as unemployment rise.

Inflation is expected to continue falling sharply, Mr Darling said, reaching about 1 per cent on the Government's preferred measure by the end of this year. Deflation will continue to be shown on the RPI measure, he added. It is set to fall to about -3 per cent by September, before moving back above zero next year.

A widely-trailed car scrappage scheme will be implemented next month to provide motorists with a £2,000 discount on new vehicles bought when they trade in cars over 10 years old, Mr Darling announced. The scheme will end in March 2010.

Mr Darling also announced a blitz of measures to stop UK unemployment spiralling higher as the recession bites. An additional £1.7bn was pledged to support the unemployed.

From January everyone under the age of 25 who has been jobless for 12 months will be offered a job or a place in training with additional money on top of benefits for those in training.

The "stamp duty holiday" on properties sold for less than £175,000 is to be extended until the end of the year, Mr Darling announced.



http://www.telegraph.co.uk/finance/financetopics/budget/5200435/Alistair-Darling-unveils-50-per-cent-tax-rate-in-Budget-2009.html