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8/8/2019 Britain's Austerity Program
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Britain HELL? CURSE?
GAN Hui Yu | GENG Alexander | HUANG Jieying | LEONG Edwin Chang Sheng | TAN
AusterityProgram
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utline ofPresentationritain s Economic Background:iscal Policy Austerity Program
: .ebate Austerity vs Stimulus?ill Britain Face a Double Dip Recession?
s Austerity the right medicine prescribed toBritain?ould there be an Austerity overdose?onetary Policy
Conclusion
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ritain s Economic Situationeading up to Austerity Program
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ritain s economic situationeading up to the AusterityProgram
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ising Public SectorDebt
ector spending plans based on these unsustainable
-r e C r is is Y ea r s i n:r i t a i n
Rapid growth in tax r&
Unsustainable profits remunerationin financial sector
Property Boom
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ising Public SectorDebt
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nsustainable levels of Privateector Debt:Household saving ratio lowest level
:Household debt %100 of
:Companies debt %110 of
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inancial Crisis
ystem has become one of the most highly leveragedn particularly vulnerable to financial instability
:it hard by the financial crisisoss of confidence and withdrawal of credit
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attern of unbalancedgrowth :1997 to 2007 Government consumption increased from %8 to :Recession Government consumption accounting for . %3 5 of
:1997 to 2007 Business investment fell from . % %1 75 to 10 : %Recession Business investment falling more than 25 to . %25
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&o overcome the fiscal economichallenges
:estoring the economy to, & -ustainable Balanced Private sector led growth
Saving Investment Enterprise
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ritain s AusterityProgramDecrease in government expenditurIncreases in individual taxes
Cuts in welfare benefits Encouraging growth in enterprise
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ndividual Taxes( ):alue Added Tax VAT
. % %,Increase main rate from 17 5 to 20 from January 20
:ayroll taxes for employees Rise by 1 percentage point from
April 2011
:nsurance Premium Tax % %Increase standard rate to 6 and higher rate to 20
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inancial Sector
:evy on banks balance sheets Intended to encourage banks to move to less risky funding p
:inancial Activities Tax Planned tax on bank profits
and remuneration
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ublic Sector
Reduction in Departmental Expenditure Limit
& -Review re approval of significant items of spending inher
A two year pay freeze for public sector workforce
%Ministry of Defense plans to cut 10 of budget over four
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Welfare
Restrictions in Tax credits policies
&Reduction in Maternity benefits Child Benefits
:Plans to remove cap in university fees May double
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Enterprise
:orporation Tax % %Sequential decrease from current 28 to 24 in 2015
:nterprise Capital Fund Introduction of fund providing additional equity finance of
:nterprise Finance Guarantee Increase to provide 200m in additional lending for SMEs
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.usterity vsStimulus
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he argument behindAusterity
-ut budget deficit to ensure long term sus Restore confidence amongst investors Support a balanced recovery
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, ,he boom not the slump is the right timeor austerityRemoving spending from the economy will
reduce levels of aggregate demand andcontract the economy
Threat of global stagnation pointed outat the G20 Toronto summit
Downward spiral might potentially hitthe economies that experience deflation
Opponent of Austerityeynesian Theory
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, ,he boom not the slump is the right timeor austerity
Opponent of Austerityeynesian Theory
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Reluctance of businesses tventuallyriggered adownturn
, ,he boom not the slump is the right timeor austerity
Cut back on deficit spending
Opponent of Austerityeynesian Theory
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he argument behind Stimuluseynesian TheoryWeak private demand.
Low business confidence.What can we do?
We need to maintain the total level of spending and output to rei
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:Job Creationigher employment :Multiplier Effectconomic growth
xpanded Economy - -eficit will self correct to pre recession
Government stimulus program can drive up aggregate dem
he argument behind Stimuluseynesian Theory
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roponents of Austerityeynesian Theory Mythment stimulus program can drive up aggregate demand
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ment stimulus program can drive up aggregate demandUnless country is not loaded with excessi
roponents of Austerityeynesian Theory Myth
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Multiplier effect:Economic Growth
quivalence of public andrivate spending- -icardo
roponents of Austerityeynesian Theory Myth
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Multiplier effect:Economic Growth apan and its years of deflationary s
quivalence of public andrivate spending- -icardo
roponents of Austerityeynesian Theory Myth
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ill Britain Face a Double DipRecession?
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:ase Study Britain afterorld War IIational Debt as aercentage of GDP
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. .K GDP History
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Yield Curves
. .ield Curve for U KGilts
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ndex of Leading Indicators. .K LEI
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Asset Prices
verage House Prices. .n U K
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200 a dayverage house price drop ineptember 2010.38 06m -aily write offs of loans by&anks building societies
,567 peopleade redundant daily,21 000 >nemployed for 12 month
,000umber of new debt problemsealt with by CAB each day
,57 737verage household debt180m ersonal interest paid in UKdaily
very 14 minutesproperty is repossessed.very 3 78 minutesomeone will be declarednsolvent or bankrupt
, ,357 500 000aily increase in Government( )ational debt PSDN
nteresting Factse bt L ev el s
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Debt Levels
. .K Personal DebtLevelsTotal Secured
Lending
Total Other Consumer Credit Len
Total Credit CardLending
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s Britain Facing aouble DipRecession?
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conomic Objectives ofritain s Austerity ProgramRebuild and Reinforce market confidence in British
,In the long run British government wants to restore e
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ain Debates of Austerityn Britain
stimulus or fiscal austerity be the right medicine prescribed te a a usterity overdose? Is fiscal austerity being implemented to
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ould fiscal austerity oriscal stimulus be the rightedicine prescribed toritain?.Fiscal Austerity
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ear .ed into people s mind It has been compounded from the collapse of the f
Britain has the highest amount of debt among the Group 7 nations
ould fiscal austerity oriscal stimulus be the rightedicine prescribed toritain?
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-a credible fiscal consolidation plan willrestore confidence and foster economic
recovery
d securities such that the interest rates in Britain has fallen below t
ould fiscal austerity oriscal stimulus be the rightedicine prescribed toritain?
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neffectiveness of stimulus measur.a new atmosphere of frugality in Britain Fall of personal debt from $2
, .In 2009 Gordon Brown cut the VAT tax from 17 5
Japan
ould fiscal austerity oriscal stimulus be the rightedicine prescribed toritain?
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Fiscal Austerity
ould fiscal austerity oriscal stimulus be the rightedicine prescribed toritain?
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What is considered an austerity overd
government cuts its spending so severely that it does not signal confi
ould there be an austerityverdose? Is fiscal austerityeing implemented too severely?
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ould there be an austerityverdose? Is fiscal austerityeing implemented too severely?
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, .For now no overdose
ould there be an austerityverdose? Is fiscal austerityeing implemented too severely?
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, .now Britain has made a painful but wise decision to apply austerity
, e short run Britain s economy may contract and there would be job losse,g run austerity may be able to bring about the desired confidence and
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ritain s MonetaryPolicy Britain s useof a monetary
policy tosoften the blow
of the
austerityprogram
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ritain s Monetary:olicy Quantitative( )asing QE
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mpact of QE on Britain set Export Ideally QE could
boost UK netexports
,In Britain s caseimpact of QE is
not very:significant
Competitivedevaluation
measures arewidely used
Exports areincreasing at a
lower rate thanimports
QE Implemented
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valuating :ffectivenessritain s MonetaryPolicy
-Britain s monetary policy has not attained its much desired results
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-hort Term Effectiveness ofritain's Fiscal andonetary Policies Fiscal consolidation
reduces AD
Low interest rateand QE aims to
increase AD butunable to offset
the decline in theGDP
:Stand AD isunlikely to improve
significantly in-the short term due
to decline inconsumer spending
AS0
AD0
AD1 AD2
Real GDP
PriceLevel
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ritain s AusterityProgram
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ritain s InflationRate CPI annual
inflation was. %3 1 in
September
Clothing andfootwear prices. %rose by 6 4
Food has thelargest upward
effect
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ritain's UnemploymentRate Highest since1992
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uture Plans to Embark:n Britain
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HE END