United Kingdom Public Finance - Research Paper Example

?Public Finance Introduction In recent decades, world economy has become much more integrated than earlier, and globalization has impacted greatly oneconomic policies of the country. Both developed and developing countries shared their contribution to this growth. Adding, governments have played significant role in public spending. The gradual transition from old age agricultural economy into new age industrial economy created new type of problems. Urbanization and modernization leads to radical socio-economic changes which in turn cause new conflicts and tensions while erasing old age fraternal security in the society. The main aim of any social security measure is to provide the confidence for individuals and families that their quality of life would not be eroded by economic or social eventuality. It includes sickness, old age, family, unemployment, maternity, invalidity benefits, and medical care. In democratic countries, implementation of welfare schemes for the vulnerable groups such as children, women, and aged people with disabilities is the political necessity of the society (“Vito Tanzi’’). People of the country need security against certain possible risks to which they are perennially exposed. The family is the oldest and the primary institution of social security. The situation leads to need for social security differs from place to place. In Europe, industrial revolution which concentrated at urban and industrial centers affected the rural folk badly by disturbing the institution of social security in the joint family system. When an individual was unable to take care of his/her family, society comes forward to protect them while realizing the importance of social security. In United Kingdom, laws were enacted for providing minimal food and shelter in a workhouse to the poor. Along with these, additional economic and social security measures such as private savings, private insurance, life insurance, mutual aid, mutual benefit schemes, and compensation by employers’ medieval guilds were implemented both by government and private sectors (“Madhava Rao’’). Social security The need for social security support for any country is greater than ever. Governments should provide protection for their citizen against economic risks in the form of economic benefits and tax credits. These may help families with the costs of bringing up children and enable to save for retirement which provides support for them in their old age. In the way governments so far ruled Britain took many steps to redistribute income to alleviate poverty, and help people to maintain living standards. Since 1997, governments carried out major changes in both policy and administration to reform the social security and tax systems with the purpose of modernizing the welfare state. In social security, mainly two basic entitlements, viz, human rights and citizenship rights were becoming an important factor. Both these together include economic, social and cultural rights (“Julia Griggs’’). Human rights are generally universal and unconditional. They have seen as placing responsibilities towards an individual. On the other hand, citizenship rights are related to membership of a particular country. General citizenship includes the responsibilities such as paying taxes, care for children, and uphold the law. However, the terms and conditions of rights and responsibilities differ from country to country as some countries spend more on social security and their demanding conditions match with generous rights. Both human rights and rights of citizenship have been used as arguments for economic, social as well as cultural rights. Adding, the right to social security involves the right to gain access and maintain benefits. Public Finance Public finance generally deals with the finances of the government which includes the rising and disbursement of its funds, and is concerned with the operation of the public treasury. In recent days, the study of public finance is increasingly assuming importance as it is a matter of developmental issue of the society. It has mainly four divisions. First one is public revenue, second one is public debt, third one is public expenditure, and the last one is fiscal administration and fiscal policy. Public finance generally deals with the general public, and may involve legal problems. Moreover, in some cases public finance overlaps with the public law (“Rodallega’’). In modern days mainly two types of technological innovations were introduced in many parts of the world in the field of tax. The first one is global and progressive income tax, and the second one is value added tax (VAT). Besides, some countries levy social security taxes. As a whole in many industrial countries the tax level would exceed 40-50 percent of GDP. But, in some Latin American countries tax levels remained below 20 per cent even today (“Tanzi’’). When we go back to the history of these two tax systems, we come to notice that, after the Second World War, American tax consultants promoted global income tax system to the other countries. On the other hand, the value added tax system was originated in France, and was replaced the turnover tax system on transactions that was common in most European countries. It allowed countries to zero rate on exports and imposition of imports while eliminating discord between trading partners. Adding, it gave freedom for countries to impose whatever rates they wished. Moreover, VAT has proven to be a major source of revenue, and useful instrument for most countries belonging to customs unions. As a result more and more countries were started to adopt VAT into their tax system. UK public finance If we take instances of UK policy and political thinking, responsibilities have become major prominent factor. The social security system of United Kingdom combines with various types of benefits which include both contributory and non contributory benefits. During the period 1960, the welfare rights movement had inspired United Kingdom greatly, which ensures that individual are aware of and claiming all benefits they are entitled to. Later, several measures have been introduced by successive governments to increase the financial appeal and viability of paid work. In this regard, introduction of national minimum wage and working families’ tax credit, in 1999, and working tax credit, introduced in 2003 were the most significant acts (“Julia Griggs’’). Employment protection, particularly for part time and temporary workers, has been improved via legislation, and maternity leave and pay have also been improved significantly. For the first time in the history of UK, paternity leave has been introduced in 2009. While treating child care as a public policy, government has increased the child care provision, and free early years education provision has been made available. Introduction of paid employment for parents, the financial provision through the child care element is also significant step. Disability discrimination act has also been introduced to accommodate the special needs of disabled workers. Anti discrimination legislation has been extended to cover a wide range of equalities. Public spending plan During the last financial year, UK government has spent nearly 43 per cent of national income for the public sector, and placed in the third position among G7 countries. In 1998, Gordon Brown, former Prime Minister of Britain introduced the division of public spending into departmental expenditure limits (DELs) and annually managed expenditure (AME). Spending in DELs can be controlled rather than being driven by demand. Composition of total managed expenditure as a percentage of national income. Fig 1: Source: Institute for Fiscal Studies For an example, spending on education, transport, and on NHS falls in this category. On the other hand, spending by local authorities, debt interest, and social security payments fall under AME category. During last financial year, DELs accounted for 58%, while the rest accounted for AME (" Rowena Crawford ''). During the last financial year, spending on social security, education, public order and safety, National Health Service, defense, transport, and net debt interest payments together accounted for nearly 80 per cent of total spending. Among these, spending on social security accounted for 27 per cent. Government's spending per family amounted to about 2,600 pounds on education, 5,400 pounds on social security, 800 pounds on debt interest payments, 3,600 pounds on health, 1,100 pounds on public order and safety, 700 pounds on transport, and 1,200 pounds on defense. Public spending on education, health, and social security has been increasing over the past few years, and has been at the expense of other spending areas. In contrast, spending on net debt interest payments and defense shows slow growth. In recent years, share of public spending on social security is becoming the single largest component, and had risen to 30 per cent. Defense spending decline began shortly before the end of the cold war. Spending on public order and safety include the immigration, fire services, criminal justice system and citizenship functions (" Rowena Crawford ''). UK government spending measured as total managed expenditure, by function. Fig.2. Source: Institute for Fiscal Studies Now, Britain's public sector accounts for 53.4 per cent which is bigger than European Unions' average, as it took rapid growth under labour which makes up more than half of the economy. Country's economy suffered a 0.5 per cent contraction, and inflation accelerated to the fastest pace. At the same time, consumer prices rose to four per cent from 3.7 per cent of last year, and the overall production output lowers. Country's GDP grew by 0.5 per cent, and household expenditure fell by 0.6 per cent during the last one year. Commuting patterns are vastly different between workers in London and rest of UK as seen in the figure 3, and nearly 75 per cent workers take half an hour or less to travel from home to their working place. Nearly half of the commuters in London used public transport for travel. In contrast, nearly 9 per cent commuters in rest of UK used public transport for travel. Mode of travelling of working people in London and rest of UK. (In percentage). Fig. 3: Source: Office for national statistics. Employment opportunities are higher in public sector than private sector, as a record 6.09 million people were working in the public sector. Whereas in private sector employees facing the risk of sack. According to the office for national statistics, each day in the last year, an average 1400 workers lost their jobs in the private sector. Growing unemployment rate is a major concern for the government as the number of people claiming unemployment benefit rose by 2,400 last month, following successive falls in the previous three months. Moreover, unemployment rate in the 16-24 age groups rose to nearly 9, 65,000 which are the highest since the records began in 1992. Labour dispute is one more setback for the economical growth of Britain. In the last one year, nearly 1, 45,000 working days lost from labour disputes. Adding, life expectancy increased during the period both in males and females. Some statistics about UK public finance. Population 5.9 Crore GDP growth 0.5 % Inflation rate CPI 4.5%, RPI 5.2% Employment rate 70.7 % Unemployment rate 7.7% Household saving ratio 5.4 % Life expectancy among males 77.7 years Life expectancy among females 81.9 years Economic growth 1.7% Patent tax 10% Main rate of corporation tax 26% Deficit on trade in goods and services 2.8 billion pounds The number of people unemployed 2.49 million Current budget deficit 8.4 billion pounds Public sector net debt 60.3 % of GDP Public sector net debt 910.1 billion pounds Public sector net borrowing 145.9 billion pounds Source: Office for national statistics. Conclusion Public finance helps to provide protection for their citizen against economic risks in the form of economic benefits. The need for social security support for any country is greater than ever, and since 1997, governments took several measures both in their policy and administration to reform the social security with the purpose of modernizing the welfare state. The right to social security involves the right to access and maintain benefits. Spending on social security links with the state of the economy as in UK prior to recession spending on social security had remained low which accounted for 11 per cent of the national income, which now rose to 30 per cent. At the same time spending on public health also raised significantly. These hikes necessitated because of government's generosity of benefits targeted at lower income families with children over the period. In UK policy and political thinking, responsibilities become prominent factor, and the social security system combines with various types of benefits including contributory and non contributory. UK is now utilizing more funds from its public spending on education, health, and social security, and spending less on debt interest, and defense sector. Public spending accounts for nearly 43.2 per cent of national income. Even though spending in most areas has grown over the recent years, latest projections suggested that public spending will be squeezed over the next few years. In addition, tough choices would have been made between spending priorities. Works cited Gerri Peev. “Public sector now 53% of economy as record 6.09million Britons work for the state’’. Associated Newspapers Ltd. 23rd March 2010. Web. 12 June, 2011. Julia Griggs and Fran Bennett. Rights and Responsibilities in the Social Security System. University of Oxford.  July 2009. Web. 11 June, 2011. P Madhava Rao. ‘’Social security for persons with disabilities in India’’. Disability India Network, 2010. Web. 12 June, 2011. Rodallega. “The role of public finance in economics’’. Socyberty com. 23 May 2008. Web. 12 June, 2011. Rowena Crawford, Carl Emmerson & Gemma Tetlow. “A Survey of Public Spending in the UK’’. Institute for Fiscal Studies. September 2009. Web. 10 June, 2011. Vito Tanzi. The Role of the State and Public Finance in the Next Generation. OECD Journal on Budgeting. 31 January, 2008. Web. 10 June, 2011. Read More