Week 5: The Economy Flashcards
What is the role of the budget in the governments economic strategy and what does it normally cover?
Candidates should explain the purpose of the Budget in controlling and managing the economy and that it usually covers…
finalising spending plans,
a review of economic policy,
medium-term forecasts as well as government spending plans and taxation changes.
It aims to control inflation,
reduce unemployment,
stimulate growth and
encourage exports and investment. [Candidate may mention the spring statement.]
What is the Treasury?
HM Treasury is the government’s economic and finance ministry, maintaining control over public spending, setting the direction of the UK’s economic policy and working to achieve strong and sustainable economic growth.
What is the treasury’s objectives?
achieving strong and sustainable growth
reducing the deficit and rebalancing the economy
spending taxpayers’ money responsibly
creating a simpler, fairer tax system
creating stronger and safer banks
making corporate taxes more competitive
making it easier for people to access and use financial services
improving regulation of the financial sector to protect customers and the economy
Place the public finances on a sustainable footing
Ensure the stability of the macro-economic environment and financial system, enabling strong, sustainable and balanced growth
Increase employment and productivity, and ensure strong growth and competitiveness across all regions of the UK through a comprehensive package of structural reforms
What is the OBR?
The Office for Budget Responsibility was created in 2010 to provide independent and authoritative analysis of the UK’s public finances. It is one of a growing number of official independent fiscal watchdogs around the world.
The OBR should be outlined as an independent advisory body established by the government to analyse public finances and provide independent economic forecasts. There are two forecasts each year; one in March and another in November.
Five main purposes of the OBR?
Economic and Fiscal FORECASTING (five year plans sent out twice a year – end of November and then in March)
Evaluating performance against targets
Sustainability and balance sheet analysis
Evaluation of fiscal risks
Scrutinising tax and welfare policy costing
What is a recession?
A recession is a significant decline in economic activity that goes on for more than two quarters (a quarter is three months; Jan-Mar, April – June, Jul-Sept, Oct-Dec)
It is visible in industrial production, employment, real income and wholesale-retail trade.
The technical definition of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).
What is a double dip recession?
The economy goes into recession, but then makes a recovery, only for it to go into recession again.
Last time it happened in the UK was apparently at the beginning of 2012, but the ONS backtracked and said in one of those quarters, growth was flat.
GDP?
To measure GDP each quarter, the Office for National Statistics (ONS) collects data from thousands of UK companies. And to complicate matters, there are three ways to measure GDP! You can calculate it by adding up, for everyone in the country:
The total value of goods and services (‘output’) produced;
Everyone’s income;
Or what everyone in the country has spent.
Inflation?
Inflation is a measure of how much the prices of goods (such as food or televisions) and services (such as haircuts or train tickets) have gone up over time.
Usually people measure inflation by comparing the cost of things today with how much they cost a year ago. The average increase in prices is known as the inflation rate.
So if inflation is 3%, it means prices are 3% higher (on average) than they were a year ago. For example, if a loaf of bread cost £1 a year ago and now it’s £1.03 then its price has risen by 3%.
Use the Bank of England’s inflation calculatorto find out how prices have changed over the years.
Is low inflation good?
Yes – it means the price of goods have not risen by much in the last year.
It will also help a country recover after a recession.
The interest rates must, however, be low for this to happen.
Low inflation and low interest rates decrease the cost of borrowing encouraging people to take loans and invest or spend.
Low-interest rates may, however, make banks reluctant to issue loans since the returns on loans are equally low.
A low inflation and low-interest rate environment may, therefore, have a negative effect on consumption.
What is CPI?
CONSUMER PRICE INDEX Depending upon the selected set of goods and services used, multiple types of inflation values are calculated and tracked as inflation indexes.
Most commonly used inflation indexes are theConsumer Price Index (CPI)and theWholesale Price Index (WPI).
The CPI is a measure that examines theweighted averageof prices of a basket of goods and services which are of primary consumer needs.
They include transportation, food and medical care.
Interest rates?
An interest rate is a percentage charged on the total amount you borrow or save.
Even a small change in interest rates can have a big impact. It’s important to keep an eye on whether they rise, fall or stay the same.
If you’re a borrower, the interest rate is the amount you are charged for borrowing money – a percentage of the total amount of the loan. You can borrow money to buy something today and pay for it later.
Interest is what you pay for the privilege. It’s a bit like hiring a car. Interest is what you pay to ‘hire’ someone else’s money.
If you’re a saver, it’s the same except the interest fee is paid to you – because banks are paying to hire your money.
Monetary Policy Comittee
The Monetary Policy Committee (MPC) is made up of nine members – the Governor, the three Deputy Governors for Monetary Policy, Financial Stability and Markets and Banking, our Chief Economist and four external members appointed directly by the Chancellor.
External members are appointed to make sure that the MPC benefits from thinking and expertise from outside of the Bank of England. A representative from HM Treasury also sits with the MPC at its meetings. The Treasury representative can discuss policy issues, but is not allowed to vote. They are there to make sure that the MPC is fully briefed on fiscal policy developments and other aspects of the Government’s economic policies, and that the Chancellor is kept fully informed about monetary policy.
Direct and indirect taxes
Direct taxes are those that are taken at source such as income tax.
Indirect taxes are those which are added to purchases. VAT is an example of an indirect tax.
What is the Treasury’s responsibilities?
public spending: including departmental spending, public sector pay and pension, annually managed expenditure (AME) and welfare policy, and capital investment
financial services policy: including banking and financial services regulation, financial stability, and ensuring competitiveness in the City
strategic oversight of the UK tax system: including direct, indirect, business, property, personal tax, and corporation tax
the delivery of infrastructure projects across the public sector and facilitating private sector investment into UK infrastructure
ensuring the economy is growing sustainably
