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Brown’s fiscal rules to be changed

By: BILL BLEVINS [email protected]

Bill Blevins is Managing Director of Blevins Franks. He has specialised in expatriate investment and tax planning for over 35 years. He has written books and gives lectures on this subject in Southern Europe and the UK.

UK PRIME Minister, Gordon Brown, and Chancellor of the Exchequer, Alistair Darling, are under fire again.

Together they plan to change the fiscal rules, virtually carved in stone since the Labour government took power in 1997, to dig themselves out of a fiscal hole.

The plan is to extend the ‘sustainable investment rule’, the limit the government allows itself to borrow over an economic cycle, beyond the maximum of 40 per cent of gross domestic product (GDP) to avoid putting up politically damaging taxes or cut public spending. The so-called ‘golden rule’ only allows over an economic cycle for borrowing to pay for investment in public projects such as schools, hospitals and roads and not to pay for costs such as welfare payments. However, the credibility of the golden rule has been undermined by the government’s tendency to redefine the length of the economic cycle.

The unions have responded by claiming a free rein on wage deals in the public sector, kept down to the inflation target of around two per cent by Brown. The unions feel that Darling’s potential altering of the golden rule strengthens their case in seeking higher wage deals and have pressed the government to tear up the golden rule on not using borrowed money to pay for public sector wage increases.

Higher wage deals could force up rising inflation and shove interest rates higher still which would drive down the slowing economy further.

Tax revenues have already shrunk due to the economic downturn brought on by the credit crunch. Revenue from stamp duty alone, a levy on property purchase, is thought likely to fall short by five billion pounds sterling.

Corporation tax is expected to be down as well as VAT as the public is forced to tighten its spending. Treasury coffers are depleted further by unexpected payouts by government gaffes.

Nationalising Northern Rock has cost billions and there was 2.7 billion pounds sterling paid out over the 10 pence tax fiasco. Postponing the two pence increase in fuel duty has set the government back by 550 million pounds sterling.

Forecasts reveal that the 40 per cent level of government debt will reach 39.8 per cent in 2010/11 and so is already close to being broken.

Treasury figures show that borrowing has soared by 65 per cent so far this year. During the first three months of the fiscal year, the Treasury borrowed 24.4 billion pounds sterling. The Office for National Statistics has reported the biggest budget deficit since the aftermath of the Second World War. Any change to the fiscal rules is expected to be announced in the Pre-Budget Report in the autumn.

House price news

UK house prices have slumped by just over six per cent according to latest data from mortgage lenders Halifax and Nationwide. This wipes out Halifax’s estimates of a 5.2 per cent gain in 2007. June’s figures reveal that it is the biggest drop for more than 15 years. Research by Oxford Economics predicts that prices will fall by a further 2.1 per cent next year.

A 15 per cent drop in house prices for 2008 is forecast by Global Insight with a 12 per cent fall next year. This would result in a 26 per cent decline in house prices since their height in August 2007. Capital Economics forecasts a drop of 35 per cent over the next three years.

A survey by the Royal Institution of Chartered Surveyors (RICS) reveals that estate agents reported that they sold an average of 15 properties in the three months to the end of June, a 40 per cent decrease for the same period last year. It is the lowest figure recorded by RICS in 30 years.

A near stagnant mortgage market has pulled down house prices and difficult borrowing costs make it harder for people to take out loans.

According to the Halifax, the average house price today is two per cent higher than two years ago, 10 per cent higher than in June 2005 and almost 40 per cent above the level in June 2003.

There may be an end in sight for the house price slump. The National Housing Federation (NHF) predicts that by 2010 the downturn would be over and prices would start to rise and likely to increase by 25 per cent over the next five years.

The NHF predicts a rise of 5.2 per cent in 2012 and nine per cent in each of the following two years.

Gas prices shoot up

British Gas, the UK’s largest energy supplier, has hiked gas prices by a massive 35 per cent.  This is its second increase this year, after increasing bills 15 per cent in January. It has been called the ‘biggest energy price rise in history’.

Managing Director, Phil Bentley, said he regretted the increase but the business was operating ‘at a significant loss’. He explained that wholesale gas prices for the coming winter have increased by 89 per cent on the previous winter and wholesale electricity prices 72 per cent. “The simple fact though, is that we have entered an era of unprecedented high world energy prices”.

British Gas also raised the price of electricity by nine per cent.

The company supplies gas to 10 million households. Half of these also receive electricity from it and will see their energy bills shoot up by 25 per cent.

These high prices add to the inflationary pressures facing British households, with several economists forecasting inflation could now reach five per cent by the autumn.

EDF Energy has also increased its prices (gas by 22 per cent and electricity by 17 per cent) and the other major suppliers are expected to follow suit.