Tuesday, June 22, 2010

How the United Kingdom will balance its budget

Yesterday in the United Kingdom, the coalition government of Prime Minister David Cameron released its emergency Budget. One item that caught my eye in this time of HST implementation was the change to the UK's Value Added Tax (VAT). On January 4th, 2011, the tax will increase from its current level of 17.5% to 20%. In proportion, it's similar to the increase in Nova Scotia's HST from 13% to 15%. What was particularly interesting was that this increase is expected to raise over £13.5 billion in a full year by 2014 - 2015. As well, the United Kingdom VAT rate still falls well short of the maximum of 25% allowed under European Union law.

The United Kingdom has reached the point of budgetary desperation. As it stands now, the United Kingdom is considered by many economists to be the most indebted nation in the world. Their national debt stands at nearly £924 billion. Their public sector net debt (as shown in the chart below) is projected to reach 70.3% of GDP by 2013 - 2014.

By comparison, the United States debt to GDP ratio is 88.9% and Canada's is in the neighbourhood of 35% depending on the source used. The United Kingdom's budget deficit is projected to be £148 billion for fiscal 2010 - 2011; it is hoped that the increased taxes (except corporate taxes) and reducing spending in today's budget will help balance the budget by 2014 - 2015. In today's budget, the government anticipates expenditures of £44 billion on debt interest alone in 2010 - 2011; this is projected to rise to £67 billion by 2014 - 2015. The UK had been threatened with cuts to their credit rating by two rating agencies unless the new government made major changes to their tax and spend philosophy; the UK had not balanced their budget since 2002 - 2003 and their debt growth far exceeded their economic growth.

If the United Kingdom feels that it is prudent to at least partially balance their budget deficit using an increase in their VAT, I suspect that they will be setting the trend for other jurisdictions. As I noted in yesterday's post, Nova Scotia has already increased its HST. Quebec is raising its QST in two stages from an effective rate of 12.875% to 13.925% on January 1, 2011 followed by another increase to 14.975% on January 1, 2010. In both cases, these consumption tax increases are being used to help their respective governments balance their rather frightening budget deficits. In the cases of Ontario with its net debt of $193 billion and 2009 - 2010 budget deficit of $19.7 billion and British Columbia's net debt of $29 billion and their 2009 - 2010 budget deficit of $1.7 billion, it will be very, very tempting for them to raise the provincial portion of the HST once the two year term of holding rates steady, agreed to with the federal government, has expired. Apparently, governments really do regard value added taxes as a cash cow despite their protestations to the contrary when they are trying to implement said taxes!

As an aside, here's an interesting twist on the HST story for Ontario residents who, unfortunately, don't have recall legislation. It seems that the McGuinty government has reached the point of desperation in their attempt to "sell" the HST to their electorate.

Ontario residents may be aware of this website, but I'll share it for those who aren't. It is part of the Liberal Party of Ontario website; when you click on the "Learn More" button on the opening page of the www.ontarioliberal.ca website, you are automatically redirected to the Strong Medicine for Ontario website.

It has a small Liberal Ontario logo in the upper corner and a selection of propaganda videos that you can watch which, quite naturally, do everything in their power to promote the massive advantages of implementing the HST. I really liked the column on the right side that had Twitter comments from various anonymous people with no political affiliation whatsoever (or so the Party would have us think). I particularly liked the postings by AMontgomery86 who informed me that she "Enjoyed the informative new video re: HST paid for with the Liberal's OWN money!" and "As a student, I'm looking forward to how much I know I'll benefit from the HST". Just wait until you're in the workforce and have to pay a whole pile of taxes Ms. AMontgomery86, then we'll see if you change your tune, that is, if you are a real person!

The first video on the list was released Monday; it is a video of Premier Dalton McGuinty doing a last minute, hail Mary promotion of the HST. The video is also posted on YouTube just in case you want to avoid the rest of the Liberal Party propaganda on the website:

Here's the YouTube video:

It's well worth a watch , even if just for the cinematographic value. Notice that Premier McGuinty is wearing a nice conservative blue dress shirt, but it's open at the collar so he looks a little more like "the small people on the street". If you listen carefully, you can hear the birds chirping merrily in the background; it seems that even they are convinced of the merits of the HST.

At the end of the video, the viewer is informed that the ad was "Paid for by the Liberal Party of Ontario". At least the Ontario Liberals have done that part right. I wonder if they'll do the same thing when they increase the HST in 2012?

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