Taxes, interest rates, inflation…

news: Taxes, interest rates, inflation…

A look at the local and international issues of the moment

Portugal – more financial woes

THE EUROPEAN Commission has given Portugal three years to rein in its budget deficit. The deficit of 6.83 per cent is the highest in the EU and more than double the maximum allowed by the Stability and Growth Pact.

EU Commissioner for Economic and Monetary Affairs, Joaquín Almunia, said: “Bringing public finances back on a sound footing is an urgent necessity for the Portuguese authorities and not just something that has to be done because of ‘Brussels’ and the Stability and Growth Pact.”

Lisbon has been instructed to reduce its deficit to 6.2 per cent by the end of this year, to 4.8 per cent next year, 3.9 per cent in 2007 and 2.8 per cent in 2008.

The ruling came on the same day as the surprise resignation of Finance Minister, Luís Campos e Cunha. He may only have been in office for four months, but he made an impression nonetheless.

Although Prime Minister José Sócrates’ election campaign had made no mention of tax hikes, just a few days after being named Finance Minister, Campos e Cunha had announced that tax increases would be needed in the medium term to help bring the deficit under control.

A new Finance Minister was quickly chosen. Fernando Teixeira dos Santos, head of Portugal’s Securities Market Commission, was hastily sworn in on July 20. The programme of tough financial measures, including increases in taxes, will continue as planned. Portugal will face penalties if it does not control its deficit and Sócrates was quick to insist that, “exactly the same policy will continue under a new minister”.

UK – new economic data lets Brown off the hook

Gordon Brown has moved the goal posts. The UK’s Chancellor of the Exchequer has changed his interpretation of the economic cycle in such a way that allows him to meet his fiscal rules.

Brown told MPs that recent amendments to economic data by the Office for National Statistics suggest the current economic cycle began in 1997 – two years earlier than the date upon which he had based his fiscal policies until now.

As a result, Brown believes that he has much more leeway to borrow to finance public expenditure, averting the need to raise taxes in order to stick to his self-imposed ‘Golden Rule’ – borrowing only to finance new investment in public services, rather than to pay for day to day expenditure.

According to Brown, the combined budget surplus in the additional two years of the economic cycle mean that he has a buffer of £12 to £15 billion in his spending and borrowing plans.

“We would meet the Golden Rule irrespectively,” Brown told MPs. “I just ask you to look at the evidence. The evidence is four years of growth above 3 per cent. Now on the surface that suggests that we did not go through a complete economic cycle.”

City economists were far from convinced by Mr Brown’s arguments and suggested that he is merely cooking the books in a bid to maintain the Golden Rule.

US – Bush’s tax relief

to shrink federal deficit

The White House has confirmed that the federal deficit is expected to fall sharply this year and will continue falling faster than predicted over the next four years, while the strengthening economy bolsters tax receipts.

According to the Bush administration’s midyear update on the budget, this year’s deficit will be $94 billion lower than first anticipated and will fall to www.33 billion – $79 billion less than in 2004.

At its currently forecast level, the US budget deficit for 2005 would be smaller than the deficits in 15 of the last 25 years, according to the White House.

UK – inflation at

seven year high

Lower interest rates are not good news for savers, but when it is coupled with high inflation it is even worse.

UK inflation rose to two per cent recently – a seven year high. The Office for National Statistics said higher prices for fruit and meat in particular, had pushed the inflation rate up. The steep rise in petrol prices over July is likely to push inflation even higher in the coming months.

Nonetheless, analysts did not change their predictions of an August interest rate cut, expecting it to be cut by a quarter point to 4.5 per cent in spite of the inflation figures.

If rates were cut at the August meeting (this article is published the day after the decision was taken, but the result is not known at the time of writing), it will be the first cut in two years. At the Bank of England’s July meeting, four out of the nine members voted to cut rates.

When the meeting minutes were released, the markets began pricing in a further cut to 4.25 per cent before the end of the year. Some economists believe more drastic action will be taken.

US – Greenspan sees good times ahead

In his semi annual report on US monetary policy, Federal Reserve chairman Alan Greenspan declared that the US economy is in good shape and the positive news should continue as long as the bank keeps nudging interest rates higher. “Our baseline outlook for the US economy is one of sustained economic growth and contained inflation pressures.” He added: “In our view, realising this outcome will require the Federal Reserve to continue to remove monetary accommodation.”

In his testimony, Greenspan said that the Fed was worried in May about an apparent soft patch in the economy, but that over the past two months, economic data has turned around.

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By Bill Blevins,

Financial Correspondent,

Blevins Franks