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Week Ending: 26 March 2010
Economic commentary for March – all eyes on the Budget
On Wednesday the Chancellor presented his Budget for the forthcoming year. In the run up to the big day there has been a huge amount of debate about the Government’s plans for addressing the UK’s considerable levels of public borrowing. This stems from the wide divergence of views across both the political spectrum and the economics profession as to how rapidly the Chancellor should seek to reign in the country’s debt levels.
The complexity of the national economy means that our understanding of its precise workings is necessarily limited and subject to great uncertainty as to how it will respond to different policy stimuli. This provides great scope for economists to come to different policy conclusions depending on the assumptions they adopt in their economic models.
The fear of reducing the deficit too rapidly in the immediate term is based upon concerns that private spending and investment would prove too weak to sustain overall economic growth in the event that supporting public spending was removed. This would thereby plunge the country back into recession.
If on the other hand a credible plan for reducing the deficit in the medium term is lacking, then investors may demand higher rates of return for holding government debt, which could force up long term interest rates and dampen longer term growth and recovery.
Policy makers are therefore presented with a difficult dilemma.
The European Commission has certainly indicated that it believes the risks lie more towards borrowing levels becoming unsustainable. EU rules state that government deficits should remain below three per cent of Gross Domestic Product (GDP).
The recession has meant lower tax revenues to governments and higher spending in the form of social security payments which have combined to severely dent the public finances across the continent as well as elsewhere. This has led the Commission to allow Members States to breach temporarily the deficit limits enshrined in the EU Stability and Growth Pact until more normal times can be resumed.
The Commission has set the date by which countries’ deficits must return to normal at 2015.
Recently revised figures for the UK suggest that its public deficit might be lower than the £178 billion forecast for the current fiscal year, which amounts to 12.6 per cent of national GDP. This however exceeds EU rules by a considerable margin.
The Government has committed to halving the deficit within four years but this would still breach the Commission’s rules that Member States should realign their deficits with the three per cent EU limit over roughly the same period.
It is widely expected that an incoming Conservative administration would seek to cut public spending more rapidly than the current Government’s plans and probably be closer aligned to the Commission’s proposals. Many commentators however believe that this could jeopardise the recovery and see the UK slip back into recession. This is a debate which is only likely to be resolved by the passage of time over forthcoming years.
Meanwhile, across the Atlantic the economic news seems to be relatively positive despite the US suffering a huge financial shock following the collapse of its domestic housing market. Growth figures for both the UK and the US were recently revised upwards. But while for the UK the last quarter of 2009 saw GDP grow at a relatively anaemic rate of 0.3 per cent (previously estimated at just 0.1 per cent), the US saw its growth figure revised up to almost 1.5 per cent for the same period suggesting that the US economy may be rebounding far more rapidly from its steep recession.
At first glance both economies seem to have suffered similar distress following a lengthy accumulation of too many resources directed towards the housing and financial sectors. One factor which may now be helping the US is its smaller overall share of public sector GDP, coupled with relatively flexible labour markets and a business environment which is generally considered to be friendly towards start-ups.
During normal economic times there is a constant churn of employment with people moving in and out of different jobs over time and the net impact roughly balancing. In a recession however new job creation tends to slow which leads to a net rise in unemployment.
The above mentioned factors in the make-up of the US economy may now be helping it to create new jobs at a faster pace than in the UK as both economies try to reallocate resources away from the bust housing and finance sectors and towards more productive uses.
A strong recovery in the US would prove to be good news for the rest of the world as the American economy continues to be the main driver for global economic growth despite the vast volumes of media coverage devoted to the rise of China.
For further information please contact Jacob Hayler at j-hayler@esauk.org
Revised landfill diversion targets
Defra has proposed to change the definition of municipal waste to ensure that the UK’s approach is consistent with other EU Member States. The revised approach – agreed with the European Commission and now subject to consultation – would bring a much larger proportion of commercial and industrial (C&I) waste managed by the private sector within the definition of municipal waste. It is proposed that a proportion of waste classified within Chapter 19 (waste from treatment facilities) and 15 (packaging waste) of the European Waste Catalogue would now be classified as municipal waste.
Under the broader definition of municipal waste, revisions would be made to the UK’s 1995 baseline landfill rate and its landfill diversion targets. Essentially, both the 1995 baseline and landfill diversion target years would be revised significantly upwards, in fact almost doubled, to account for an increased amount of C&I waste classified as municipal waste.
Based on the assumption that biodegradable waste constitutes 68% of municipal waste, Defra suggests that England has already achieved its revised 2010 landfill diversion target but would still require significant landfill diversion to meet the revised 2013 and 2020 targets (diversion of 0.5mt and 4.8mt of biodegradable waste respectively).
Given the proposed broader definition of municipal waste, the current approach to the Landfill Allowance Trading Scheme (LATS) would no longer be directly applicable: as the allowances would only address half of the new municipal waste stream. Defra has suggested that the scheme would be reviewed and has sought views on the effectiveness of LATS going forward, particularly in light of other policy mechanisms, such as rising landfill tax and proposals for landfill bans.
While ESA considers there would be scope to review LATS, the scheme should remain in place to provide local authorities with the incentive to achieve higher rates of recycling and continue to divert waste from landfill to meet the revised targets.
For further information please contact Stephen Freeland at s-freeland@esauk.org
Landfill bans
Defra and the Welsh Assembly have issued a joint consultation on the proposed introduction of further restrictions on the landfill of biodegradable and recyclable wastes. Proposals for further material restrictions have been informed by a project carried out last year by WRAP. After considering a number of candidate waste types, the consultation has concluded that landfill restrictions for food waste, green waste, paper/card, wood, textiles and metals would offer the greatest potential to reduce landfill emissions and increase resource efficiency.
For further information please contact Stephen Freeland at s-freeland@esauk.org
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