Public and Private Finance in Property - Essay Example

? Public and Private Finance in Property Public finance Public finance can be understood from three core perspectives namely (i) resources generation (ii) economic stability and effective resource allocation. The central government (HM Revenue and Customs) has to ensure that it has generated enough revenue that can accommodate annual expenditure plans. This means that if the HM Revenue and Customs is not in position to collect adequate revenue that can effectively meet the government expenditure plans then the government will forced to borrow additional. The monies that the government has borrowed from the public to finance its expenditure programs for a particular fiscal year is referred to as budget deficit and it consequently contributed to the ultimate public debt of a country. In other words, budget deficit is the difference between government’s income and its expenditure. Presently the UK government is indebted owing to the fact it has been spending more than its revenue and therefore this report will focus on the cause of UK indebtedness and the ways (fiscal and monetary) of reducing the level of debt. Government Revenue It is noteworthy that the bulk of the UK government revenue comes from taxation and therefore taxes forms the backbone of the UK economy. Key sources of the tax revenue include but not limited to income tax, corporate tax, property tax, national insurance contribution, customs duty, fuel duty and value added tax (VAT). For a long period HM Revenue and Customs has managed to collect steady tax revenue. For instance in the last five fiscal budget years starting 2006/7 -11 the central government has managed to collect the following revenue (?billions) 519.2, 548.9, 533.3, 513.3 and 551.7 respectively (The guardian, 2012). This means that the tax base has been increasing from time to time, which is important for the growth of the economy. It is also plausible that the UK government has made significant forecast with respect to future tax revenue. For instance in the next 4 fiscal years starting 2011/12-15 the HM Revenue and Customs expects to collect the following revenue (?billions) 575.5, 594, 624, and 657 (HM Treasury, 2012). The increase in tax revenue can be attributed the increased consumption levels, reduction in unemployment rate, increased exports, growth in corporate profits as well as increased foreign direct investments. The British government does not only depend on tax revenue to fund its budget but also other sources which include state owned organizations, privatizations, foreign direct investments, sale of assets. The British government own several corporations, which forms a commendable source of revenue to the government in form of profits. For instance, the UK government own the postal service company- Royal mail, train-operating company-East Coast, and education holding company- BPP Holdings. The British government has been involved in a number of privatizations whereby the government relieve its ownership and interest in parastatal to private investors. An example of such privatization includes that of the British rail in 1993. British government is major player in local business and this is evident through participation in sovereign wealth funds. The UK government own motorways, harbours, airport terminus and sewer lines that forms an important source of revenue to the government when members of the public use these infrastructure. The government has also in a number of occasions disposed off its assets to get additional revenue in order to fund its operations. Government Expenditure The UK government has been experiencing a number of challenges with its expenditure patters for a long period. It is quite unfortunate that the UK government’s total expenditure for its fiscal years have always surpassed its revenue (Parliament, 2012). This trend has remained like this for a considerable period. The government has been forced in most cases to borrow surplus funds from the public in order to meet its expenditure need. However, it is good news that the government has been trying hard to reduce the level of its borrowing. Depending on borrowed money in order to funds budget plans is not advisable owing to the fact that it brings about several drawbacks to the economic stability. Just like the government, revenue has been on steady rise and the government forecast also indicates that there will be massive increase in the government expenditure. For instance, in the next five years beginning financial year 2011/12-16 the government expects to spend (?billions) 683, 703, 722, 740 and 760 respectively (Ukpublicspending, 2012). Key areas of government expenditure include but not limited to healthcare, defence, education, welfare, and pension. The with twist in the demographic change characterised by baby-boomer population the government expects to spend more in pension, welfare and healthcare taking into consideration that the aging population are highly dependent just like children. Budget deficit The UK government has had problems with funding its budget adequately and as such, they have always been forced to borrow additional funds from the public to accomplish their spending objectives. The budget deficit refers to the gap between what the government receives and what the government is capable of spending. British government 2010 budget short fall which was equivalent to 10.4% of the Gross Domestic Product (GDP) as per the statistical data of the 27 member states of European Union meant that Britain had larger annual shortfall than two unstable economies-Spain and Portugal. Based on the data provided by the National statistics, UK budget deficit increased considerable during the global financial crisis (Elliott, 2010). However, it is gradually coming down an aspect that is quite impressive. The government was shocked in February when the budget deficit ballooned overwhelmingly in the month of February as the expenditure increased with reduction in tax revenue. The independent Office for Budget Responsibility belies that the budget deficit for 2011/12 will remain at ?126bn and then to fall to ?92bn in the next fiscal budget and to ?21bn in 2016/17 (HM Treasury, 2012). There has been a lot of debate about the causes of UK budget to be quite expansive in the recent past but consensus is yet to be established. A number of studies reveal that the global financial crisis, which plunge the UK into recession, is one of the main contributors to the ever-increasing UK budget deficit. The British government was forced to spend more than what they have owing to reduced tax revenue. Recession, which hit the UK in 2008 forced most, companies to terminate employment of most of their staff in order to cut costs and maintain profitability (HM Treasury, 2012). Another major cause of unemployment was due to reduced consumption of goods and services, which translated to reduced production. Most individuals lost their jobs thus interfering with their propensity to spend. The government lost massive revenue in form income tax, corporate tax and VAT owing to loss of employment, reduced earning and reduced spending tends respectively. Increased unemployment translated to increase spending on welfare on the government side despite low tax revenue (Elliott, 2010). Another major cause of expansive budget deficit in the recent past involves bailouts. Most of the corporations’ financial strength was hit negatively by the financial crisis and as such the government had to secure funds to bailout these important companies. Most of the financial institutions were the beneficiaries of the government bailout. For instance, Royal Bank of Scotland (RBS) was the biggest recipient of government bailout in the wake of recession in 2008. These bailout monies had to increase the government expenditure despite the frozen tax receipt. The prolonged recession could also be another major contributor to the increased budget deficit, as the government had to deal with long period of high unemployment rates, reduced tax revenue, spending on unemployment and tax holiday. For instance, the British government was faced with the challenge of spending at least ?500 million to rescue paltry 100,000 jobs (Parliament, 2012). Source: www.parliament.uk UK Public Debt UK public debt refers to the total amount of money that the United Kingdom owes the private investors. Most governments have a tendency of borrowing money from members of the public and private corporations in order to meet their budgetary goals. Governments have always used a wide range of approaches towards public borrowing. For instance a government can decide to borrow from its own citizens, or foreign nationals. Monies can also be borrowed in local or foreign currency. The most renowned cause of public debt is budget deficit. In other words, budget deficit is the major cause to the ever-bulging UK government public debt. For a long period of time UK government has not been in a position to fund its fiscal year budget adequately and such they have been forced to borrow from private investors. As such, the national debt has been escalating from time to time. Graph Showing UK National Debt Source: National Statistics The above graph is a clear indication that the UK national debt has had an upward trend. This implies that UK government indebtedness is not something to celebrate about. The current UK public debt as at February 2012 stood at ?988.7 billion, which is approximately 63.0% percent of the GDP. The public annual borrowing for the fiscal year 2010/11 was equivalent to ?143.2 billion, which is equivalent to 11.7% of the GDP. However, the government is optimistic that the public debt will reduce in the next few years as the global economy is continuing to stabilize. How to reduce UK debt level The first remedy for reducing the UK public debt as well as doing away with budget deficit is by ensuring that the government improves its tax revenue. The tax revenue can be increased by increasing tax rate of various forms of taxes. For instance, The UK government should increase its VAT from 17.5% to 20%, as this will help the government gain additional revenue. The government should also consider increasing the national insurance contribution and capital gain tax to boost its revenue. The government should also withdraw all the tax holiday. Another most important strategy for minimizing public debt is through sovereign wealth funds. The government should consider leasing its major motorways, port infrastructure, sewer system and other major infrastructure that calls for heavy investments in order to cut down on its expenditure. The private investors can manage the infrastructure and charge user to recoup their investments. References Elliott, L 2010, What caused the deficit? Retrieved April 21 2012 from: http://www.guardian.co.uk/politics/2010/jun/07/what-caused-budget-deficit HM Treasury, 2012, Public Expenditure Statistical Analyses. Retrieved April 21 2012 from: http://www.hm-treasury.gov.uk/pespub_index.htm Parliament, 2012, The economic recovery and the budget deficit, Retrieved April 21 2012 from: http://www.parliament.uk/business/publications/research/key-issues-for-the-new-parliament/the-public-finances/the-economic-recovery-and-the-deficit/ The guardian, 2012, Tax receipts since 1963, Retrieved April 21 2012 http://www.guardian.co.uk/news/datablog/2010/apr/25/tax-receipts-1963 Ukpublicspending, 2012, Public Spending Details for 2012, Retrieved April 21 2012 http://www.ukpublicspending.co.uk/year_spending_2012UKbn_11bc1n#ukgs302 Read More