Is Austerity The ?New Normal??

29.11.11

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When countries across the western world began implementing austerity measures it was hoped they would only be needed for a short time while economies got back on track. However with

When countries across the western world began implementing austerity measures it was hoped they would only be needed for a short time while economies got back on track. However with slow economic growth and high debt levels it looks like we?ll have to get used to austerity measures as they?ll be around for a while.

UK

Chancellor George Osborne set himself two budget goals when he took office, to eliminate the structural deficit and for debt to be falling as a percentage of national output by 2015.

In mid November Barclays Capital warned that weak growth, less ?spare capacity? in the economy than thought and higher unemployment mean that Osborne will take two years longer than expected to reach his goals, and even then he will only do so ?by the skin of his teeth?.

According to Barclays Capital, the Chancellor will not have room to reduce tax and if he presented any tax breaks in his Autumn Statement they would have to be clawed back somehow.

The Bank of England (BoE) had already cut its growth forecasts and on 16th November Sir Mervyn King, Governor of the BoE, warned that there may be no growth until the middle of next year.

This prognosis means that the Sterling interest rate is likely to remain 0.5% for the foreseeable future, and a further round of quantitative easing is expected in February.

Speaking at the CBI conference on 21st November, Prime Minister David Cameron admitted that although the UK grew faster than average and than many EU countries in the last quarter, ?we are well behind where we need to be? and ?getting debt under control is proving harder than anyone envisaged?.

More recently, Osborne?s Autumn Statement on 29th November conceded that his budgetary target will not be met until 2016/17. It also included the latest growth forecasts from the Office for Budgetary Responsibility (OBR), which now expects growth of 0.9% this year (reduced from 1.7%) and 0.7% next year (reduced from 2.5%).

Not good news for either the government or UK residents was a report called ?The Long Game? which was published by leading think tank Reform in November.

Declaring that ?austerity is the new normal?, it said that Britain needs 10 years of austerity measures to fix its economic problems, even under the best economic scenario.

Europe

I think there is little doubt that austerity will become the new normal in many Eurozone countries.

The Euro Plus Monitor 2011, published on 15th November, examines progress in Europe. In its Overall Health Indicator rankings, the bottom 7 Eurozone countries (out of 17) are Malta, Spain, France, Italy, Portugal, Cyprus and finally Greece. The same seven are also in the bottom in the Growth Potential rankings, though when it comes to Debt Profile Spain does much better and is at number 5.

Italy is probably already in recession according to ratings agency Fitch. It has a ?1.8 trillion public debt ? the third largest in the world.

The economy in Spain has flatlined, with zero growth in the last three months and it could be heading for a recession. More austerity is widely expected, with newly elected Prime Minister Mariano Rajoy having promised to introduce ?serious? and ?profound? austerity measures to turn Spain?s fortunes around.

France introduced a second wave of austerity measures in November, including more tax reforms ? less than three months after a previous round of supplementary budget measures. Prime minister Fran?is Fillon said the time had come to ?protect the French from the grave difficulties experienced by many European countries? and that ?our financial, economic and social sovereignty require prolonged collective efforts and even some sacrifices?.

On 22nd November EU economic affairs commissioner Olli Rehn sent warning letters to Cyprus, Malta, Belgium, Poland and Hungary, warning them that they risk violating fiscal rules next year and could be fined. He expects them to take appropriate measures as they would not meet their fiscal targets in 2012 without more spending cuts or tax increases.

The governor of the Cyprus Central Bank has already warned that Cyprus may need to raise taxes to pull out of the economic crisis.

Portugal is already bound by its bail out package. According to the Euro Plus Monitor it has made a significant adjustment effort since 2009 but is still among the worst performers in Europe. Its weaknesses are a very subdued trend growth; insufficient export orientation; wide current account deficit; high underlying fiscal deficit in 2010 and an unsustainable fiscal position.

All in all, it looks like austerity measures will be in place for much longer than expected, and austerity measures of course include tax increases, whether direct taxes on your income and wealth , or VAT increases putting up your cost of living, or indirectly through cutting tax breaks or freezing thresholds and scale rate bands.

While some of the tax measures being introduced are only meant to be temporary, at the rate things are going they?ll be around for longer than promised. And there?s nothing to prevent a temporary tax becoming a permanent one ? did you know that income tax was introduced in the UK as a temporary tax by William Pitt the younger in 1799 to raise money to pay for the Napoleonic wars after the country had run up a considerable national debt?

If you haven?t already done so, this is the time to look to protect your assets from tax as much as possible. Talk to an adviser like Blevins Franks about compliant tax saving opportunities in your country of residence.

By Bill Blevins, Managing Director, Blevins Franks

24th November 2011, updated 30th November 2011

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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