It has been a very interesting week to observe global economics. Starting in the US the release of unemployment data suggests the US economy continues to prosper with continued increase in non-farm sector jobs and an increase in average weekly wages. This has led to some questioning when the Federal Reserve Bank will increase rates – the general consensus remains that the FED will increase its rate in the middle of 2015.
In contrast the Eurozone is still suffering with the introduction of an asset purchase programme and an ongoing debate as to whether full blown Quantative Easing would be acceptable to all members.
The Autumn Statement made for interesting reading, especially given the fact that there is a General Election due in 2015. It seems however that regardless of the results of the next election one thing is for sure; there will continue to be even greater austerity measures.
The issue for any government is that it was commonly thought that after the financial crisis that increased tax revenue from a small amount of economic growth and reduced welfare spending, would result in a rapid reduction of the deficit. This has not happened.
The majority of growth in the UK economy to date has only resulted in lowly paid jobs, which means that there has been very little benefit to the Exchequer. Furthermore, the Government raised the personal income tax allowance, which has taken many of those in the new lowly paid jobs out of income tax altogether.
Another interesting fact is the effect of the ageing population on pensions. It is forecast that pensions will cost the Government nearly £150billion in 2015, which would be 20% of all expenditure.
The combination of the ‘taxless’ recovery and unavoidable increases in welfare expenditure means that economic growth alone will not eliminate the deficit – regardless of the ruling political party.
The weak economic outlook in the Eurozone, our largest trading party, has probably contributed significantly to any attempts to reduce the deficit the Chancellor may have considered to date, although the prospect of the General Election may have also played its part. Regardless it seems that significant cuts will have to be made, which could be a big shock. The only way to counter this would be to introduce radical plans to encourage businesses to see the UK as a place they want to set up and operate from. The issue currently is that EU legislation would prohibit such plans, which could result in the need for the UK to break away from the EU. Whether this is part of the bigger picture only time will tell.