The credit rating has already been downgraded as investors, creditors and rating agencies feel that UK will experience trouble paying back its debts in the future.
1st July 2013
The UK Government has increased its borrowing from the bond markets even as its debt stands at 75 % of its GDP. The government’s debt to the bond markets has been increasing heavily in the past five years, and as per the Trading Economics, UK ranks 13th in the world for total debt to GDP. The credit rating has already been downgraded as investors, creditors and rating agencies feel that UK will experience trouble paying back its debts in the future. Growth in the country has come to a standstill and businesses are lesser inclined to invest in the nation due to the slow moving economy. Inflation is rising continuously and the CPI index has increased even further, standing at 126 points, which has reduced the confidence of the consumer and resulting in less spending, which in turn is affecting many businesses.
More Taxes
The Institute for Fiscal Studies said that despite the £ 11.5 billion worth of reductions for 2015-16 set out by George Osborne, savings of a similar magnitude had already been penciled in for the following two years. IFS Director, Paul Johnson said there would now have to be a “serious debate” on whether fiscal retrenchment on such a scale would be achieved through more spending cuts alone or whether taxes would have to rise as well. The prospect of a tax hike looms large after the elections.
Real disposable income of Britain fell by 1.7 percent in the first three months of 2013, the biggest quarterly drop since 1987, driven down by a steep fall in wages and rising prices which has reduced the savings of the households to the lowest share of income since 2009. The country’s current account deficit with the rest of the world has widened unexpectedly to 3.6 percent of GDP and business investment has slumped by 16.5 percent mainly due to low consumer spending, casting doubts on the government hopes for an economic recovery through exports and capital spending.
Deficit is the gap between what the government spends and its income generation, mainly from taxes. Big deficits are inevitable during a recession, the spending goes up to pay benefits related to unemployment. Tax income falls due to lesser consumer spending and VAT collection also goes down rapidly as businesses fail. If countries spend more than they get back from tax, they normally have to borrow money to make up the difference. Since governments are constrained most of the time due to many factors which include recession, most governments have a national debt. This is the net amount borrowed by the government, not for the current year but the total borrowing to overcome its deficit. When the country is out of recession and when its businesses thrive, it can repay a part of the debt and the total comes down partially. The difference between national debt and deficit is national debt takes into account the total borrowing of the country of not only the current year but also the past. The deficit is a snap shot of how the country’s finances are doing in any one year. A country like Britain with larger national debt will find it harder to run a deficit as it is harder and more expensive to borrow money.