Treasury and Economics

Question 1

Inflation causes

Answer 1

Question 2

Inflation consequences

Answer 2

• People can buy less with their money and so the demand for goods drops; output drops since there is no point making goods that people will not buy; and unemployment rises.
• Falling real incomes: It hits pensioners and those on fixed incomes hardest. Their living costs are going up but their income remains the same.
• Negative real interest rates: If interest rates on savings accounts are lower than the rate of inflation, then people who rely on interest from their savings will be poorer.
• Exports may be hit if we have high inflation and other countries do not. Our goods and services will be expensive, so consumers abroad will not buy them. Our consumers will buy foreign goods if they are cheaper.
• Result – more unemployment.
• Cost of borrowing becomes higher as banks protect their loans -mortgage crisis

Question 3

CPI & RPI

Question 4

Recession

Answer 4

a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

Question 5

Recession causes

Answer 5

Normal economic cycles – historically economies have always grown and then slowed.

Inflation/deflation

Oversupply. In an economic boom, companies tend to increase production to meet consumer demand. When demand peaks and starts to decline, the excessive supply of goods and services that aren’t consumed can lead to a recession, with companies producing less and downsizing while people lose purchasing power and consumption continues to fall.

Uncertainty. Not knowing how the economy will change makes business decision-making riskier. Wars and pandemics are two situations that can make consumer trends unpredictable in the short, medium and long term, thus generating economic uncertainty. Because businesses and people hold off on spending and investment decisions, economic activity declines.

Speculation. In general, economic bubbles form when the price of something suddenly rises due to speculation, market trends or consumer confidence. Investors buy it up, hoping to earn a return from the price increase. However, when they start to sell it off, supply exceeds demand (i.e. there are fewer new buyers) and drives prices down, causing the bubble to burst. This happened with tulips in the 17th century and the housing market in 2008.

Question 6

Tactics to deal with inflation

Answer 6

Raising interest rates, QE (buying bonds)

Question 7

GDP

Answer 7

Gross domestic product is the total value of goods and services produced in a country in a one-year period. It is a domestic index and includes the value of goods produced by foreign companies in that country (e.g. Honda cars built in the UK).

Question 8

Interest rates

Answer 8

An interest rate tells you how high the cost of borrowing is, or high the rewards are for saving.

So, if you’re a borrower, the interest rate is the amount you are charged for borrowing money, shown as a percentage of the total amount of the loan. The higher the percentage, the more you have to pay back, for a loan of a given size.

If you’re a saver, the savings rate tells you how much money will be paid into your account, as a percentage of your savings. The higher the savings rate, the more will be paid into your account for a given sized deposit.

Question 9

Direct taxes

Answer 9

Income Tax
Corporation Tax
Capital Gains Tax
National Insurance Contributions
Statutory Payments
Inheritance Tax
Petroleum Revenue Tax
Student Loans
Stamp Taxes

Question 10

Indirect taxes

Answer 10

VAT
Customs Duty
Excise Duties
Insurance Premium Tax
Environmental taxes, including Air Passenger Duty
Climate Change Levy
Aggregates Levy
Landfill Tax

Question 11

Balance of payments

Answer 11

The balance of payments / current account is an account which records a country’s economic transactions with the rest of the world.

The account consists of the:
* balance of trade (visible balance)
* invisibles (invisible balance)
The balance of trade (visible balance) is the difference in value between a country’s exports and imports of goods – i.e. things you could see if you sat on the dockside.
The invisibles (invisible balance) is the difference in value between a country’s exports and imports of services. This includes: banking, insurance, tourism, transport, etc.

Question 12

Role of OBR

Answer 12

Official independent fiscal watchdog: independent analysis of the UK’s finances. An executive non-departmental public body sponsored by HM Treasury.

We have five main roles:

1. Economic and fiscal forecasting

Five-year forecasts for the economy accompany the Budgets. They incorporate the impact of any tax and spending measures announced in those statements by the Chancellor.

2. Evaluating performance against targets

We use our public finance forecasts to judge the Government’s performance against its fiscal targets.

3. Sustainability and balance sheet analysis

We assess the long-term sustainability of the public finances: These long-term projections cover different categories of spending, revenue and financial transactions, and we assess whether they imply a sustainable path for public sector debt.

4. Evaluation of fiscal risks

Our annual Fiscal risks and sustainability (FRS) periodically provides a comprehensive review of risks from the economy and financial system identified in our fiscal risk register, and also includes discussions of specific fiscal risks.

5. Scrutinising tax and welfare policy costing

We scrutinise the Government’s costing of individual tax and welfare spending measures at each Budget. The Government provides us with draft costings in the run-up to each statement and we subject these to detailed scrutiny and challenge.

Question 13

Budget overview

Answer 13

Finalises government spending plans, analyses the state of the economy, arranges tax collection. It is presented by the Chancellor of the Exchequer and has to be passed by the House of Commons (House of Lords has no power over the budget).

Question 14

Budget overview

Answer 14

Finalises government spending plans, analyses the state of the economy, arranges tax collection. It is presented by the Chancellor of the Exchequer and has to be passed by the House of Commons (House of Lords has no power over the budget).

Question 15

Monetary Policy Committee

Answer 15

Bank of England lends to other banks, issues bank notes, arranges government borrowing, and sets interest rates through the Monetary Policy Committee. The MPC is given an inflation target by the government and it tries to meet the target using interest rates.

Question 16

Role of Treasury

Answer 16

HM Treasury is the government’s economic and finance ministry. It is responsible for overall economic and fiscal policy, particularly, in determining public expenditure levels and taxation policy.

Question 17

Mechanics of the Budget

Answer 17

In the Budget speech, the Chancellor:

1) explains last’s year’s accounts - how much spent and raised in taxes, nation’s finances and current economic conditions
2) predicts current financial year - likely out-turn for taxes and expenditure
3) outlines government’s plans for public spending in the current financial year
4) predicts state of economy for the next financial year - unemployment, GDP, inflation, etc.
5) announces tax changes and reasons for them

A. Provisional collection of taxes: Some measures, such as any changes to the rates of duty on alcohol and tobacco, come into effect on Budget day or soon after. The power to make these changes on an interim basis, before the Finance Bill is passed, comes from the House of Commons approving a motion for the provisional collection of these taxes. After the Chancellor finishes the speech, but before the Leader of the Opposition responds, the Chairman of Ways and Means puts a single motion to the Commons asking for agreement to these changes. This is called the ‘Provisional Collection of Taxes’ and is by convention agreed to by the House, meaning that the changes can come into effect at 6pm on Budget day.

B. Traditionally the Leader of the Opposition, rather than the Shadow Chancellor, replies to the Budget Speech.

C. The Budget is usually followed by four days of debate on the Budget Resolutions, the tax measures announced in the Budget. Budget Resolutions can come into effect immediately if the House of Commons agrees to them at the end of the four days of debate but they require the Finance Bill to give them permanent legal effect.

D. A new Finance Bill is presented to Parliament; it enacts the proposals for taxation made by the Chancellor of the Exchequer. The House of Lords has a limited role in respect of Finance Bills. The House of Lords will have a second reading debate on the Finance Bill but they will not consider the Bill clause by clause and will not amend the Bill.

E. The Commons Treasury Select Committee is a cross-party committee of MPs whose role is to scrutinise the work of the Treasury. Following each Budget statement the Treasury Committee conducts an inquiry into the Government’s proposals, gathering evidence from expert witnesses and publishing a report with its conclusions and recommendations.

The Government then produces a report in response to the Committee’s findings, often with a contribution from the Office for Budget Responsibility (OBR).