Research Dept. News
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Monthly Report, num 356 - April 2012
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European union - United Kingdom
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The United Kingdom: revising taxes to boost the economy
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The fiscal consolidation efforts carried out by the United Kingdom over the last year have taken their toll with a sharp fall in economic activity, as shown by the growth in gross domestic product in 2011, which was just 0.8%. Moreover, the economic outlook is still not very optimistic.
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Given this situation, the UK Chancellor of the Exchequer, George Osborne, has announced a reduction in the rate paid by the highest income bracket and also in corporation tax, whose aim is to boost private investment. The rate for incomes over 150,000 pounds per year is likely to decrease from 50% al 45%, as from April 2013. Although the more significant change in the short term is the downward revision of corporation tax, which will decrease from 26% to 24% as from April this year and is expected to stand at 22% in 2014.
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Inflation continues to fall in the United Kingdom.
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George Osborne believes this will make the United Kingdom one of the most competitive countries in terms of attracting firms. However, he repeated his intention to offset these tax cuts to maintain the fiscal austerity plan. For this reason, he has decided to raise the taxes levied when buying a home valued at more than 2 million pounds sterling, by 5%. On the other hand, to stop the practice of avoiding stamp duty when buying a house through a company, he has passed a new 15% tax for such cases. To date, the stamp duty had been scaled, its highest level being 5% for houses worth more than one million pounds.
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The Chancellor will also reinforce measures to combat tax evasion. And he has raised the tax levied on the assets of banks operating in the United Kingdom. Indirect taxes have also been raised, such as the tax on tobacco, up by 37 pence per box of cigarettes. In this way the Chancellor hopes to prevent the country losing its top credit rating, which is currently AAA. The target is to eliminate the fiscal deficit by the 2017 tax year, which is currently more than 8% of gross domestic product. And the challenge during the tax year beginning in April 2012 is huge, as the goal is to reduce the fiscal deficit to 5.9% of GDP by the end of March 2013.
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This announcement was made within a context of lethargic aggregate demand. The weak labour market affected retail sales in February, down 0.8% month-on-month, the largest fall in the last nine months, and the figure for January has also been revised to 0.3% from 0.9%.
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On the external side, the United Kingdom's trade balance in January posted a deficit of 7.5 billion pounds. This negative balance has deteriorated since December, although less than the months of October and November, so that, should it continue, the foreign sector would contribute positively to growth in the first quarter. Of note is the good performance by exports to countries outside the European Union, especially cars and oil, due to price rises.
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In terms of supply, industrial production continues to deteriorate, posting a 0.4% drop month-on-month in January, while the year-on-year figure shows a contraction of 3.8%. Most items show contraction, almost without exception. Curiously, this figure contrasts with a slight improvement in the country's business sentiment surveys.
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Financial tension has eased in emerging Europe.
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Inflation continues its downward trend, as shown by the figure for February with year-on-year growth of 3.4%, two tenths of a percentage point less than the previous month, although the rise in oil prices has slowed up February's decrease. Nonetheless, this is still the lowest level since November 2010 and reflects a significant fall since the 5.2% recorded in September last year. However, the Bank of England itself, in the minutes published for its monetary policy meeting in March, and regarding the preceding meeting, stressed its greater concern for inflation and its possible effect on future wage pressures. It even announced that its 1.8% forecast for the end of 2012 does not totally reflect the risk supposed by the rise in oil prices seen over the last few months.
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