Treasury Flashcards
2020 budget - furlough etc
The 2020 Budget, delivered on March 11, has been badly blown off course by the coronavirus crisis.
The Chancellor has announced significant increases in health spending, help for small businesses, paying up to 80% of workers’ wages, increased funding for charities, and help for the self-employed. There has also been a massive increase in the numbers of people claiming benefits, such as Universal Credit.
This is likely to significantly increase government spending in the coming months.
At the same time government income, in terms of direct taxes such as income tax and national insurance, and indirect taxes such as VAT, alcohol and fuel duties are likely to be reduced because of increased unemployment and reduced spending because people are confined to their homes.
This will have to be paid for – either by way of increased borrowing, increased taxes or printing money, or all three as the economist who is the guest on the programme has suggested.
The treasury quick summary
The most senior minister in the treasury is the Chancellor of the Exchequer (currently Rishi Sunak)
He controls fiscal policy - that is tax and spending
He also controls the national debt - currently £2.1 trillion.
He is responsible for managing unemployment and inflation
Where does government money come from? Direct taxes
Direct taxes - taxes on income - includes taxes taken directly from salaries such as income tax and national insurance, plus company taxes such as corporation tax (a tax on company profits) and capital gains tax (a tax on certain items if there has been an increase in value).
Direct taxes are said to be progressive, in that they are based on the ability to pay - the rich pay more than the poor.
Indirect taxes
These are based on consumption and include such things as sales tax (VAT), alcohol, fuel and tobacco duty, green taxes on energy bills.
These are said to be regressive in that they are not based on the ability to pay and the poor pay the same as the rich.
What is the difference between debt and deficit?
These are frequently confused.
If the government spends more than it takes in revenue (income taxes), the difference between the two figures is the annual deficit.
The debt is the accumulation of all the deficits.
UK government spending
The pandemic and related public health restrictions hit the economy hard. This resulted in lower income from taxes and (to a lesser extent) more government spending on areas such as unemployment benefits.
The UK gov spent £672bn in 2010 and will spend approx £848bn in 2020/21.
Overall Uk gov spending is increasing despite austerity measures and some cuts to individual departmental budgets.
The UK government has revenues (mainly tax receipts) of about £811bn in 2020/21
The difference between these two figures (that is income and expenditure) - around £37bn a year in 2020/21 needs to be borrowed and is the annual deficit.
This is added to the deficits we’ve run up in previous years to give us the total debt - around £1.9 trillion and rising.
This is about 84% of GDP (a measure used by economists to compare the scale of debt in different countries)
We pay about £50bn a year in interest payments (2020/21)
What is are Ratings Agencies?
Ratings Agencies e.g. Standards and Poor’s, give countries a rating based on their ability to pay the debt back.
Lenders use these ratings to set interest rates to various countries (the UK currently has the top AAA rating so we can borrow money comparatively cheaply)
Spending departments 2020/21 figures
Health - £161bn
Pension - £162bn
Welfare - £126bn
Education - £91bn
Defence - £50bn
Debt interest - £51bn
Public order (police) - £33bn
Transport - £35bn
Where does the money come from? 2019/2020 figures
Income tax - £193bn
National Insurance - £142bn
VAT - £156bn
Excise duties (on petrol, alcohol, tobacco) - £50bn
Corporation tax (on company profits) - £60bn
Council tax - £36bn
Business rates - £31bn
Borrowing - £32bn
What is the budget?
Each autumn the Chancellor makes a Budget Speech.
He reports on the performance of the economy over the previous 12 months.
He gives the outlook for the next 12 months
He sets out plans for taxes and spending
This is proceeded in the spring by the Spring Statement or Pre-Budget Review
Every three years the Chancellor also publishes a Comprehensive Spending Review giving plans over a longer period.
The Budget Speech is accompanied by a Finance Act to implement the Chancellors plans.
The Office of Budget Responsibility
OBR was set up by George Osborne in 2010
It is responsible for economic forecasts
It is politically neutral and independent of government
The Bank of England (made independent by Gordon Brown) is responsible for monetary policy - that is setting interest rates.
The Monetary Policy Committee of the Bank of England - a group of nine economists - sets interest rates
Quantitative Easing - Bank of England buys bonds from retail banks to increase liquidity (the amount of money available) and reduce lending costs to industry and individuals.
The Office for Budget Responsibility (OBR) - which keeps tabs on government spending - said that borrowing would be £355bn for the current financial year (April 2020 to April 2021), before falling back to £234bn over the next year.
That’s the highest figure ever seen outside wartime.
Key definitions
Gross Domestic Product (GDP) - The market value of all the goods and services produced by a country
Recession - two successive quarters when the economy (GDP) shrinks
Growth - when GDP rises, increasing employment and prosperity
Inflation - an increase in prices and a fall in the purchasing value of money.
Consumer Price Index/Retail Price Index - measures of inflation using a basket of about 650 items
Balance of Trade - the difference in value between total imports and total exports.
What is furlough
Over £100bn is being spent on support for jobs, such as the furlough scheme, where the government steps in to pay most of workers’ wages.
The NHS and other public services have been given extra money to pay for the costs of fighting the pandemic.
However, the pandemic has reduced the amount the government raises in tax.
Unemployed or furloughed workers pay less income tax, businesses pay less tax if their profits are lower, and shoppers pay less VAT if they buy fewer things.
