Article 50 is a part of the European Union law that lists the process of the withdrawal of a member from the European Union. The Brexit referendum was held in the UK on 23rd June 2016, in which the majority voted to leave. The UK will trigger Article 50 on 29th March 2017. Why did it take a long time to be triggered? Prime Minister Theresa May announced in October 2016 that she did not want to rush the withdrawal process. After the article is triggered, there is a two-year time limit (during which the EU laws still apply to the UK) in which the UK have to complete negotiations. If negotiations do not go to plan, the UK will have to leave empty handed. The UK would continue to participate in the EU; however, the UK members would not be allowed to participate in discussions about the withdrawal of the UK.
The EU customs union is a system which allows all member states to follow a set of common rules about custom controls over goods entering the EU from the outside. This system focuses on the levying of tariffs and trade quotas, they also include other matters, such as checking food with health standards and checking that consumer goods comply with safety rules (e.g. children’s toys).
According to figures by the Office for National Statistics (ONS), the UK exported £134.3 billion worth of goods and services to countries in the EU but imported £223 billion, meaning there was £88.7 billion more imports than exports. This results in the EU exporters facing a struggle as their incomes will decline as the UK leave the EU. As a result of this, this will allow the EU to reach an agreement which avoids the imposition of tariffs on exports to its largest single export market (the UK), this is known as a ‘mixed agreement’.
However, an important question for the UK is: who decides whether the UK can have a free trade agreement? It will need to be finalised by EU leaders via a majority-wins vote, the European Parliament also by a majority-wins vote and by the remaining national parliaments across the EU. The general rules of the EU policy of free movement of goods and services have generally worked well with other countries, for example, Korea; This means there should be no difficulty in replicating these rules in an EU-UK trade agreement. And since this rule benefits the consumers of the imports, there is a strong argument for replicating these rules.
Other examples of negotiations that Article 50 will cover are discussions about unspent EU funds, access to EU agencies who have a role in the UK law (e.g. European Medicines Agency), access for UK citizens to the European Health Insurance card, the rights of UK fishermen to fish in non-UK waters (including the North Sea) and many others.
What happens next? During May/June 2017, the negotiations will commence. And in the autumn of 2017, the UK government is expected to introduce laws to leave the EU and to incorporate some of the EU laws into the UK laws, which is known as the ‘Great Repeal Bill’. The negotiations are said to be completed by October 2018 and in March 2019, the UK will formally withdraw from the EU (unless the two-year time limit is extended, but this will only happen if the other EU member states grant approval).
After the steep fall in the value of the sterling after the Brexit vote, expectations for inflation has risen. A fall in the value of the pound meant that goods brought into the UK are more expensive. This means that firms will past on their costs onto their consumers in the form of higher prices, which increases inflation. Sterling fell as much as 20% against the US dollar after the EU referendum in June. The Bank of England and many private economists say inflation is set to carry on increasing sharply in 2017. The quarterly survey, which was published on Friday, illustrated average public expectations for inflation over the next 12 months rose to 2.9% in February from 2.8% in the previous survey in November. And taking a five-year view, inflation is expected to be at 3.2% compared with 3.1% that was expected three months earlier.
The Bank’s Monetary Policy committee was divided on the decision about interest rates. Kristin Forbes is a member of the committee, who voted to raise interest rates as she felt that inflation was rising too quickly and that it could become a problem in the near future. Other members also indicated that they could join her in the future meetings if they began to feel the same. Ian McCafferty, who voted for an increase in the rate in early 2016, was the most likely member to join Forbes (according to analysts). Other members included Michael Saunders who came across as enthusiastic about the economy in a speech he made in January.
Forbes believes that inflation is likely to remain above the Bank’s 2.0% target for at least three years. She voted against the rest of the committee and wanted an increase in the base rate to 0.5% from 0.25%. The rest showed that the Bank of England did not want to follow the US Federal Reserve, which raised base rates on Wednesday. This was the first disagreement the committee faced since after the Brexit vote in July 2016 (when Jan Vlieghe voted for a cut in the costs of borrowing from 0.5% to 0.25% - the majority of the committee opposed him but in August 2016, they voted for a cut).
Last month, the Bank of England said it expected the economy to grow by a relatively strong 2.0% this year but was likely to slow down after the uncertainty with the country’s involvement with countries in the European Union, as they buy roughly half of Britain’s exports. This week, economists pointed out that wage growth was “notably slower” than they had thought even though the unemployment rate is now 4.7%, marking its lowest level since the summer of 2005 said the ONS, which economists say it nearly at full employment.
This week has been important for many business people, savers, students and families across the UK; this is because, the Budget was released and it is the annual financial statement that sets out the Government’s plans for spending and taxation for the coming year. As of Tuesday 8th of March, Chancellor Philip Hammond presented his first and last Spring Budget. It is his last because of the transition to a single fiscal event each year, an Autumn budget.
The Office for Budget Responsibility expects the economy would expand by 2% this year, which is an increase from their previous forecast of 1.4% economic growth. They judge that growth will moderate during 2017, as real incomes are affected by an increase in inflation due to sterling’s depreciation which leads to a slowdown in consumer demand growth. However, growth in the future years have been expected to be lower: in 2018-19, 1.6%; in 2019-20, 1.7% and in 2020-21, 2%. This means that the British economy will grow at a slower rate than before the Brexit referendum until the EU withdrawal and maybe even beyond. Higher levels of growth mean higher tax receipts and lower levels of borrowing; however, growth will be better in the short-run than in the long-run. Britain can, therefore, no longer claim to be the fastest-growing economy in the G7 group (which is a group consisting of Canada, France, Germany, Italy, Japan, the UK and the US – they are the major advanced economies as reported by the International Monetary Fund, together they represent more than 64% of the net global wealth).
There has been an increase on duties for demerit goods, for example: a packet of 20 cigarettes will cost 35p more; while it will be 44p more for a packet of 30g of hand-rolled tobacco. This is another way of decreasing the amount of demerit goods consumed. This is an example of an increase in tax revenue, which the Government can use to pay back what they have borrowed or to pay their bill to the EU. This then has an effect on public sector net borrowing, this has been forecasted to decrease from 3.8% of GDP to 2.6% this year, and reaching 0.7% in 2022.
The government has announced that it is getting rid of the Class 2 National Insurance contributions (NICs) from April 2018. The self-employed also have access to the same pension scheme as employers. This leads to an increase in the main rate for the Class 4 NICs from 9% to 10% in April 2018 and to 11% in April 2019. This means that only self-employed individuals with profits above £16,250 will have to pay more NICs. This affects 5 million people (who are self-employed) and breaks the Tory’s manifesto promise of “no increase in National Insurance contributions” that was made during the elections of 2015.
These are just some examples of the key points that were written in the Budget 2017. There are many other changes (increases or decreases) in spending, for example: the additional £2 billion given to councils in England over the next 3 years for adult social care.
Monetary policy is the manipulation by the Bank of England’s monetary policy committee of monetary variables, such as interest rates, to control inflation and reach its objectives. The committee consists of 9 economists who meet every Thursday of every month. They have a target for CPI (Consumer Price Index) inflation, which is set by the chancellor of the exchequer of 2% ± 1%.
The committee have to consider different factors when making their decision:
o Domestic monetary developments
• Bank and building society lending figures
• High street consumer credit data
• UK share prices
• House prices
• Growth of money supply
o Exchange rate
o Demand and output figures
• Retail sales
• Consumer expenditure
• GDP figures
o Unemployment figures
So as house prices are just one factor that the economists consider when making their decisions, we can question how important it actually is. Across England, by February 2016, 64% of households own their home according to the Resolution Foundation. This has fallen to its lowest level in 30 years as the gap between earnings and property prices has increased creating a housing crisis. The proportion of people who own their own home has fallen across every part of the UK since their peak in the early 2000s. Although even though this figure has decreased, it is still over half. This means that households are very sensitive to changes in interest rates as it affects their disposable income. However, as Theresa May will announce as her second biggest housing pledge, to support people between the ages of 23 and 40 to buy their first home by helping 30 areas around the country to unlock land to build on; this will increase the sensitivity of interest rates on the housing market as more people will be affected. There are about 25 million homes in the UK, of which seven out of 10 are owner-occupied. The number of homeowners has risen by more than one million since 1997.
Although, it only affects those with tracker mortgages. Tracker mortgages are a type of variable rate mortgage which follows the base rate of interest set by the Bank of England plus a charge on top that would be pre-agreed for a set amount of time. For example, if your tracker mortgage is base rate plus 2%, and the base rate is 1%, you will pay 3%. If the base rate rises to 2%, you will pay 4%. As interest rates fall, discretionary income (income remaining after deduction of taxes) rises for those with tracker mortgages. This means those households start consuming more and as consumption is a component of aggregate demand [C + I +G + (X - M)], so aggregate demand shifts to the right.
Furthermore, as Bank of England increases interest rates, the demand for housing falls because of the decrease in the demand for mortgages. Banks’ supply of mortgage equity withdrawals begin to fall so consumers have less money so consumption decreases and aggregate demand shifts to the left. This is known as the wealth effect, which is when consumer spending is affected by a change in the value of an asset, in this case house prices.
However, we should consider whether the housing market is the most important factor that the Bank of England should consider?