As of 20th January 2017, Donald Trump was inaugurated as the 45th President of the United States of America. Along with him, he brought many new policies and vows. Of which one of his vows is to make deep tax cuts while promising to increase government expenditure. He has said that he will be cutting corporation tax from 33% to 15%. Perhaps this is a conflict of interest, and it would suit his company, but there is a reason behind this. According to the Financial Times, this would increase the national debt by $7.2 trillion (including interest costs) over the first decade and by $20.9 trillion by 2036. For most people, this would seem unintelligent. However, this is what is known as expansionary fiscal policy. Furthermore, he has said he will be increasing spending on infrastructure and the military but he will be reducing spending on other categories (apart from health and retirement programmes) by 1% each year.
So how does this work? Fiscal policy is the deliberate manipulation of government spending and taxation in order to influence the economy’s economic growth. A decrease in tax will boost income, demand and GDP. When the government decreases taxes, disposable income increases. This means that consumers will demand more and therefore result in higher production, shifting the aggregate demand curve to the right, leading to an increase in GDP. An increase in government spending will boost demand and production. This will also create more jobs which mean that unemployment will reduce. Government spending increases the potential output of the economy. Also, lower corporation taxes mean that firms can invest more, contributing to AD – as investment is a component of AD, when it increases so does AD.
Yes, Trump is right in saying that tax cuts and additional public spending will lead to faster growth and in the long-run, an improvement in the US public finances. Although, who is the cut in taxes really benefitting? It will far more benefit to high-incomers rather than the low-incomers. Those earning more than $3.7 million a year would receive a tax cut of nearly $1.1 million; however, those who don’t earn as much receive a tax cut of just $110 a year. Furthermore, this policy of his may lead to a budget deficit. This is where government expenses exceed the revenue received. In order to fix this issue, the US government may have to borrow money to finance the difference – this therefore increases national debt instead of trying to decrease it.
More than 1 billion people around the world do not have access to safe drinking water. 5000 people die every day as a result of drinking unclean water. People who live in high-density air pollution areas have 20% higher risk of dying from lung cancer. United States produces 30% of the world’s waste and uses 25% of the world’s natural resources. Almost 80% of urban waste in India is dumped in the River Ganges. Over 1 million seabirds and 100,000 sea mammals are killed every year.
So what are all these statistics related to? Pollution. Pollution is the introduction of harmful substances or products into the environment. How does this issue affect the government? Well, the government would have to set new regulations and introduce funding programmes to clean up the pollution. Also, if too many people become ill from all the pollution present in our environment, actions would need to be taken to make sure the right treatment is available therefore increasing government expenditure, creating an opportunity cost.
In 2005, the European Commission set up an Emissions Trading System (ETS) in an attempt to limit greenhouse gas emissions from heavy industry. Tradable pollution permits are an attempt to solve the problem of pollution. Its main focus is to curb carbon dioxide emissions by major polluters in the European Union.
So how does it work? Every year, the European Commission allocates a set amount of carbon dioxide permits to national governments, who then divide up the allowances among firms who are a part of the scheme. These permits are tradable, which means that firms can buy and sell between themselves thereby creating a market. Most of the pollution permits are free and have been allocated to firms depending on how much pollution they created before the scheme was introduced. However, the government are able to retain up to 10% of the permits and offer them for sale. Some of the permits are also kept as a reserve to enable new firms to enter.
Is this the most efficient way to solve the issue of pollution? The price mechanism is used to internalise the negative externalities created by pollution. Furthermore, governments are able to raise their funds by selling permits that they reserved. And by having these permits, it creates an incentive for firms to invest in clean technology and so reduce carbon emissions in the long term – resulting in a decline in pollution. If firms exceed their allowance then they face fines which will increase their costs of production. This means that they learn their lesson and do not exceed their allowance next time. However, if the European Commission issues too many permits, there is little incentive for firms to reduce pollution which means that these pollution permits are pointless. Moreover, firms may decide to pass on the cost of purchasing these permits onto consumers. This means that the prices of goods and services will increase. The government also face a cost of running this system as they have to monitor the pollution emissions from the many companies part of the ETS.
We must consider that the EU is just approximately 15% of the world and unless all countries decide to run a similar carbon monitoring scheme, then global emissions will continue to increase and have many severe effects on the environment.
With the price of houses constantly rising, consumers can find themselves facing huge deposits and mortgages that will last what seems like forever. Consumers are generally figuring out that anything less than a 10% deposit simply won’t do. George Osborne invented the Help to Buy scheme in Autumn 2013 and was described by him as a ‘landmark’ scheme that would get thousands of people on the housing ladder. Help to Buy is a government scheme which is designed to help those who are struggling to save a deposit for their first move or move up the property ladder as they have limited equity.
There were, or as of before December 31, 2016, two main elements of the Help to Buy scheme:
This part of the scheme was launched on April 1, 2013 and is available until 2020. It is open to first-time buyers and home movers; however, it is only restricted to those who are buying homes that have been newly built. If you have a 5% deposit, you can receive up to 20% government equity loan which means you will only require a 75% mortgage. A smaller mortgage means lower monthly payments which results in your home being more affordable. There are no salary cap restrictions on the scheme. The 20% equity loan is provided by the government and is interest free for 5 years. In the sixth year, you will be charged 1.75% and after that, the fee rises by inflation based on the Retail Prices Index (which is a measure of inflation measured by the ONS – the Office of National Statistics). You can pay back the equity loan when you sell your home or at the end of your mortgage period. This loan has to be paid back within 25 years or when the property is sold. If the property value has increased by the time you pay back the loan, the amount to be paid back will be proportionately higher, so the Government shares any profit.
Under the programme, borrowers were able to get a mortgage with just a 5% deposit. If those borrowers were unable to make payments, the government promised to compensate the lender.
This guarantee was available for new and old properties across the UK. However, Chancellor Philip Hammond announced the ending of the Help to Buy mortgage guarantee scheme in a letter to the governor of the Bank of England, Mark Carney, in September. He stated that the scheme was created ‘with a specific purpose’ which has ‘now been successfully achieved’.
As Mr Hammond announced the closure, the Treasury published figures revealing that more than 86,000 households had been supported by the scheme. Across all the Government’s Help to Buy schemes, a total of 185,000 were bought, 150,000 of that being first-time buyers. Although the Government says it is no longer needed as confidence has returned to the market, with more private lenders now offering similar high loan-to-value loans.
This scheme was extremely useful to first time buyers with low confidence due to the 2008 financial crisis. The Bank of England declared in September that the scheme is no longer necessary due to this. Some say that scheme only made the problem worse as it increased prices by offering cheap credit and not addressing the problem of the housing crisis. Sam Dumitriu (the head of projects at the Adam Smith Institute) said Mr Hammond made the right decision.
The single market’s main aim is to simplify trade within the European Union. Since the inauguration in 1993 it has been the backbone of the European economy and has served in many ways, but with recent reports of Theresa May looking to leave the single market, people wonder what does this mean for Britain?. The main rule is the free movement from one EU member country to another of goods, people, services and capital - in other words is known ‘four freedoms’. In addition, it also eliminates tariffs or taxes on trade. The EU creates minimum regulatory standards, and then requires all members to comply with them. If Britain does leave the single market, exporters would no longer be required to make 28 variants of their products to comply with national rules.
In recent years we see that Britain’s trade with countries outside the EU is growing. Trade with the EU has been decreasing. Trade connections between non-EU and the emerging economies have been rising steadily - however the EU remains the UK’s largest trading partner. It is said that ‘The UK will not be able to dictate exit terms to the EU because it is running a trade deficit’.If there were trade barriers between Britain and the EU put in place, the EU would lose more export earnings from Britain, than vice versa. Another advantage would be that the UK would not have to follow the rules and regulation put in place, and be able to boost trade with faster growing parts of the world. Moreover, the UK’s access to non-EU markets is to a great degree determined by its membership of the EU. The UK on its own, would have much less bargaining power than the EU.
There are alternative arrangements that can be arranged to replace the departure of the single market. If Britain withdrew from full membership of the EU, it would open up many doors in terms of trading relationship. These include membership of the EEA - if Britain joined, they would have unlimited access to the single market however Britain would have no say over EU trade policy. Another alternative would be the custom union - similar to the one Turkey has with the EU. This type of arrangement eliminates internal tariff, but requires the EU to agree common tariffs with countries outside. Another possible way is the so called ‘Swiss-style’ relationship. This is based on bilateral negotiations and agreements. A free trade agreement (FTA) could also be put in play if the UK decides to leave the single market. This would mean that trade with the EU would be tariff-free and also Britain could set its own trade policies with non-European countries. The final option would be to trade under the WTO rules. Therefore means the UK would not comply with EU regulations, but with the CET.
To conclude arrangements such as EEA, ‘Swiss-style’ relationship or a custom union would be pointless as the UK would still have to comply with the EU regulations. So if the UK was to leave the EU than the best possible option is the FTA. Whilst the exit of the UK from the single market, could trigger a second referendum for Scotland, as well as one for Northern Ireland, the economy will no doubt be harmed. Angela Merkel has also emphasised that there will be no single market for the UK if it does not allow free movement, an issue many “brexiters” thought needed attention. Britain is anxiously awaiting the president-elect Trump to sort out the US trade deal, but at the moment Theresa May seemingly attempting to create a dispute that will be of no benefit for anyone.