Connect with us

Economy

How much more stimulus will the UK economy need? – Quartz

Published

 on


Spare a thought for Rishi Sunak. When he became the UK’s chancellor of the exchequer in Feb. 2020, he was known to be a deficit hawk, keen to make sure that his government borrowed and spent with abundant caution.

Then the pandemic hit—an emergency so extreme that Sunak found himself having to do the opposite. Through last year, the government rolled out hundreds of billions of pounds in stimulus spending—offering loans to businesses, paying chunks of the wages of furloughed employees, funding the National Health Service. The Office of Budget Responsibility reckoned that the government would need to borrow nearly £400 billion ($554 billion) in this financial year—the highest such sum seen in peacetime.

On Mar. 3, Sunak will present his new budget—a chance for him to exercise his fiscal-conservative instincts. “I worry because, at various points, he’s indicated that he’s keen to wind down these stimulus support schemes very quickly,” said Carsten Jung, a senior economist at the Institute for Public Policy Research.

But Sunak is under pressure—from think-tanks, the opposition, and even his own party members—to spend and borrow more, and to keep taxes low. The UK may need an additional stimulus of as much as £190 billion, or 8.6% of the GDP to restart the economy and protect businesses and families, according to a new report co-authored by Jung. So far, the report pointed out, Sunak has officially only committed around 2%.

The tension over how long the coronavirus stimulus should run, and how much more the government should spend, isn’t limited to the UK. Every economy that has been hit by the pandemic is facing versions of this debate. Does Germany need another round of 2020-like stimulus? Does the US require a $1.9 trillion spending package?  The question of how much the government ought to spend speaks to the purpose of the stimulus itself, and thus to what has to happen before the stimulus can end.

Should Sunak continue the fiscal stimulus?

Not every economic stimulus is the same. During the 2008 crisis, most of the government’s support went to the financial sector and to corporations. Back then, there was a moral argument for limiting this support: that the crisis was engendered by the malfeasances of financial firms, which therefore deserved no taxpayer bailouts. The pandemic is different—morally, because the coronavirus is no one’s fault, but also structurally, in terms of whom the economic shock has affected. “The breadth of it requires a broader response,” Jung said. “So you’d want something comprehensive, to protect jobs and businesses and public services.”

Sometimes the mission of government spending is to goose the economy—to provide incomes so that people will consume more. In the pandemic, though, the stimulus has really tried to stave off a counterfactual: people falling out of jobs, spending less, sending the economy into a negative spiral. The purpose is to contain the damage, not to be aggressively expansionary.

The UK’s Eat Out To Help Out scheme, implemented last August, provides an example. Three days a week, the government paid 50% of the tabs of diners—up to £10 per person—at participating restaurants. The government spent £849 million on the program, which lasted four weeks. A new London School of Economics report shows that footfall in restaurants increased by 5-6% on those three days, and that the food sector posted 7-14% more recruitment listings. The scheme didn’t encourage people to go out for other purposes, and it didn’t show an increase in job postings for other industries related to the food sector. But even without a more dramatic economic improvement, jobs and businesses found some security; Sunak estimated that Eat Out To Help Out protected 1.8 million jobs in the hospitality sector.

Plenty of parts of the economy need similar support: furlough schemes, emergency funds for the National Health Service, local infrastructure, the education sector. But it’s an opportune time to borrow money to spend. “We have the capacity to go big for sure,” Ben Nabarro, Citibank’s UK economist, told Bloomberg. Interest rates are low, and may turn negative as the year progresses, Nabarro pointed out, making borrowing cheap.

As a result, taxes don’t need to be raised immediately to pay for this spending. “There is strong support for the ‘war bond’ type approach of parking the lockdown debt for the long term,” one unnamed Conservative Party MP told the Financial Times. It’s a winning policy, Jung said: “It’s like you get money for free, invest it in the economy, and get a positive return by increasing GDP.”

When should Sunak end the stimulus?

One cue for governments to start unwinding their stimulus programs is a decline in the rate of unemployment. Economists estimate that, even in an optimistic scenario, unemployment in the UK will touch 7.5% once furlough support ends, up from 4.5% before the pandemic. (The most recent statistics, released in November, pegged unemployment at 5%.) Another cue is the real interest rate. “If that goes up, that’s great—that’s a sign that the stimulus has played its role,” Jung said. If Sunak rolls out a couple of hundred billion pounds more in stimulus, Jung added, “it would bring unemployment close to the pre-crisis level by 2022.”

Ideally, Sunak would lay out the full heft of the stimulus in his budget, but it isn’t certain if he will; last year, the government preferred a piecemeal approach, launching new rounds of stimulus through the year. One comprehensive announcement would allow businesses to plan; it would give investment in public services time to get off the ground. “Adding clarity would be the optimum thing to do,” Jung said. “The more we do now, the less we need to do next year and the year after.”

Let’s block ads! (Why?)



Source link

Continue Reading

Economy

South Korea economy shrank in 2020 for 1st time in 22 years – Yahoo Canada Finance

Published

 on


SEOUL, Korea, Republic Of — South Korea’s central bank says the country’s economy shrank for the first time in 22 years in 2020 as the coronavirus pandemic destroyed service industry jobs and depressed consumer spending.

Preliminary data released by the Bank of Korea on Thursday showed the country’s gross domestic product last year contracted 1% from 2019. It was the first annual contraction since 1998, when South Korea was in the midst of a crippling financial crisis.

The economy would have been even worse if not for the country’s technology exports, which saw increased demand driven by personal computers and servers as the pandemic forced millions around the world to work at home.

The bank expects South Korea’s economy to manage a modest recovery this year driven by exports. But it says it would take a longer time for the job market to recover from the damage to services industries such as restaurants and transportation.

The bank since March last year has maintained its policy rate at an all-time low of 0.5% to help pump money into the economy. But experts say traditional financial tools aimed at lowering borrowing costs have had only limited effect during the pandemic that has damaged both supply and demand.

The country reported another new 424 cases of the coronavirus on Thursday, bringing its national caseload to 91,240, including 1,619 deaths.

The Associated Press

Let’s block ads! (Why?)



Source link

Continue Reading

Economy

Canadian dollar clings to this week’s gains as oil climbs

Published

 on

Canadian dollar

By Fergal Smith

TORONTO (Reuters) – The Canadian dollar was little changed against its broadly stronger U.S. counterpart on Wednesday, holding on to this week’s gains as oil prices rose and domestic data showed the value of building permits scaling a record high in January.

The loonie was trading nearly unchanged at 1.2629 to the greenback, or 79.18 U.S. cents. Since the start of the week, it has advanced 0.9%.

Canada‘s “strong” GDP data and the rally in oil prices have helped underpin the Canadian dollar, said George Davis, chief technical strategist at RBC Capital Markets.

The price of oil, one of Canada‘s major exports, settled 2.6% higher at $61.28 a barrel, boosted by a huge drop in U.S. fuel inventories and expectations that OPEC+ producers might decide against increasing output when they meet this week.

Canadian building permits rose 8.2% in January from December to C$9.9 billion, surpassing the previous record set in April 2019, Statistics Canada said.

On Tuesday, data showed that Canada‘s economy grew at an annualized rate of 9.6% in the fourth quarter and likely rose again in January, boosting speculation the Bank of Canada will reduce its bond purchases soon.

The central bank is due to make an interest rate decision next Wednesday.

A break of 1.2587 would add “to positive CAD momentum,” while the currency could find buyers at 1.2655, Davis said.

The U.S. dollar rose against a basket of major currencies as investors priced for strong U.S. growth relative to other regions.

Canadian government bond yields were higher across a steeper curve in tandem with U.S. Treasury yields. The 10-year rose 7.6 basis points to 1.401% but was trading well below Friday’s 13-month high at 1.501%.

 

(Reporting by Fergal Smith; Editing by Jonathan Oatis and Peter Cooney)

Continue Reading

Economy

UK extends job support, tax breaks for pandemic-hit economy – Lethbridge News Now

Published

 on


U.K. public borrowing has risen to levels not seen since World War II as the government seeks to cushion the fallout from COVID-19, which has reduced gross domestic product by 10% and cost more than 700,000 people their jobs. Projections released Wednesday by the Office for Budget Responsibility show that the economy will still be 3% smaller five years from now than it would have been without the pandemic.

Sunak said government support programs have succeeded in mitigating the impact. The unemployment rate is now expected to peak at about 6.5%, rather than the 11.9% forecast last July, he said, citing estimates from the Office for Budget Responsibility. The economy is forecast to grow 4% this year and 7.3% in 2022.

On Wednesday, Sunak announced plans to extend those support programs for six months. They include a furlough program, under which the government pays 80% of the wages for private employees unable to work during the pandemic, as well as grants for self-employed workers, a temporary increase in welfare payments and tax relief for businesses.

Looking to the future, Sunak said the government will in 2023 increase corporation tax to 25%, from the current rate of 19%, and freeze personal income tax thresholds, which will increase revenue as inflation boosts incomes.

But opposition leader Keir Starmer accused Sunak of failing to address deep-seated economic problems and banking on a “consumer spending blitz” to bail out the economy.

Starmer said the budget fails millions of key workers who are having their pay frozen, businesses swamped by debt, and families paying higher local property taxes.

“The central problem in our economy is a deep-rooted insecurity and inequality, and this budget isn’t the answer to that,” Starmer said. “So rather than the big, transformative budget that we needed, this budget simply papers over the cracks.”

Ian Blackford, the Scottish National Party’s leader in Parliament, criticized Sunak for continuing a strategy of temporary support that leaves businesses and consumers unsure of the future.

The budget leaves Scottish voters with a clear choice as the SNP campaigns to hold a second referendum on independence from the U.K., Blackford said.

“For the people of Scotland, this budget comes at a critical moment of choice,” he said, echoing Sunak’s language. “Post-Brexit and post-pandemic, Scotland now has a choice of two futures: The long-term damage of Brexit and more Tory austerity cuts, or the opportunity to protect her place in Europe and to build a strong, fair and green recovery with independence.”

___

Follow AP coverage of the virus outbreak at:

https://apnews.com/hub/coronavirus-pandemic

https://apnews.com/hub/coronavirus-vaccine

https://apnews.com/UnderstandingtheOutbreak

Danica Kirka, The Associated Press

Let’s block ads! (Why?)



Source link

Continue Reading

Trending