Fall in Oil Prices and Tax Cut

According to Maeda (2008) since June, 2014 the global fall in oil price has the link with the demotivation in the business investment and for this reason the Chancellor of the Exchequer of Britain, Mr. George Orborne is going to help the companies to provide the tax breaks. The forecasting of the Bank of England has shown the 2.9 percent growth of the UK economy in this year and it will also be going to be the fastest growth rate of the economy.

Fall in oil Prices in UK Economy

The overall economic activity of UK is boosted because of the fall in production cost of the business, especially dependent on the oil input based due to the significant fall in oil prices since June, 2014. Although the oil and gas extraction sector, oil intensive and coke and refined petroleum manufacturing sectors are affected inversely due to the fall in oil prices (Hogan and Sturzenegger, 2010). But there is a chance of benefit also for the oil intensive sectors by reallocating the capital land the resources. The model of UK economy is going to be used here to quantify these effects rigorously and critically. In the words of UK Assessment - The impact of the rise in oil prices on the UK economy. (2012) it is explained that the GDP of the UK economy increased by 1% on an average due to the permanent reduction in oil price and settlement of the price at $50 per barrel to the baseline between 2015 and 2020 and there will be a positive impact in the employment generation of UK in 2016 as the result of this economic phenomenon.

The transmission mechanism due to the fall in oil price is analyzed below using the figure 1

 

Figure 1: Oil Price Fall in Transmission Mechanism

In the writing of XIAO (2009) it is explained that The governor of the Bank of England (The Central Bank of UK), Mr. Mark Carney wrote in his letter that the decline in oil price is unanticipated and unexpected too and so this phenomenon is overlooked during the monetary policy implication but there is a real boost in the GDP of UK varying in between 0.2 to 0.5 percentage for this fast change in oil price. The rise in total income of the household raises the consumer spending and the two factors behind this are – rise in real wage and price fall of the cost of savings. The tax revenue of the government is increasing due to the growing economic activity from the personal as well as the corporate taxes that exceed the total revenue from the oil and gas sector after the fall in price of the government. As a result there is a small but effective impact in narrowing the deficit in trade of UK economy (Zeng, 2012).

 

 

Figure – 2: Revenue from the oil and gas sector in UK Economy

Fall in Oil Prices and Tax Cut

The Chancellor of the Exchequer of UK, Mr. George Osborne is going to take the decision of tax cut in the oil and gas industry further to help the companies in the oil and gas industries offset the fall in global oil price (Heydová et al, 2011). According to him the decision is taken for the reduction in the tax rates on North Sea oil in the autumn statement. The pressure of the fall in oil price in the industry is anticipated by the Chancellor and so further steps are going to be taken in the budget. He was proud to announce these rustic steps in the budget to pool the anticipated risks (Webster and Ayatakshi, 2013). The phenomenon of fall in oil price is so much beneficial too for the UK economy. The government of UK is very much supportive in the robust independent analysis of the public finances of the country and the requirement of Office for Budget Responsibility for the provision of independent economic forecasts is also taken in front of the analysis to develop new economic power.

 In the point of view of Armaroli and Balzani (2011) the objective of the cut in the tax rate on the oil and gas production is safety of the industry from the “pressing danger” created from the fall in oil price and the new measures are taken regarding this of 1.3 billion euro to boost up the flagging oil production in the North Sea at the end of this decade. The reduction of tax rate is effective at different rates in the new and in the old fields of oil and gas. In case of the older one the reduction is done from 80pc to 75pc whereas is case of ewer fields the tax rate cut is from 60pc to 50pc (Dissou, 2010). Therefore, it is clear that there is a positive impact of the tax rate reduction due to the fall in oil price and the oil price is also affected by the fall in tax rate.

Fall in Oil Prices and Deflationary Economic Condition

The price war in the ongoing supermarket and the fall in price of petrol brought the inflation rate in UK down to just 1 percentage in October, 2012. XIAO (2009) had expected the drop back of the consumer’s prices index inflation from 1.2 percent to 1.3 percent and the Office for National Statistics (ONS) had also shown the fall in cost of living. According to the Economists, the price of petrol will go down two-third of the present price in this plunging world oil price season. According to the article, British Monetary Policy/ The Wrong Target? if the inflation rate can be brought below the level of 1 percentage then the Governor of Bank of England, Mr. Carney can ask for the explanation to the Chancellor of the Exchequer about the target set for the below the 2 percentage. But the ease of price pressure concludes that the spending power of most of the consumers is present in the run up to Christmas and the pressure on the Bank is also reduced to raise the rate of interest (Oladipo, 2013).

There is a vast range of energy intensive goods of which the cost of production comes down due to the fall in price of oil. At the end of June, 2014 the price of Brent crude oil had remarkably plunged below $60 from $115. There is a strong effect of the fall in petrol price in the inflation rate of the next month. According to Dissou (2010), there is an expectation regarding the steady pick up in the growth of wage rate and a declining trend in the employment pattern of UK economy in the coming six months of the year for which the MPC (Marginal Propensity to Consume) normally acts in the circumstances of falling oil price leading to the boost in the growth rate of the economy. Since 2002, the steepest drop down in price is shown in the month of November of 2014 of the commodities like, food and non-alcoholic beverages which fell by 1.7 percent in the last year, 2014. The fall in price of the petrol and diesel are respectively 5.9 percent and 2.9 percent and both are much steeper falls in the last decade and the deflation in the recent months has been stimulated by the strength of sterling as a result of cut in price of the imports (Chen, 2014).

According to Henstock (2013) an inflation rate of 1 percent or below reacts a s the threat that can bring the UK economy to very much close to the condition of damaging deflationary spiral which is in the Eurozone scenario. There is a lag in the income in real terms because of the struggle of the workers with the wages at a stagnant level that is increasing the cost of living in UK for last six years. The ONS data has shown a fall in air fare and the second hand cars are also very cheaper on the other hand in the last month. A drop down is also found in the price of the computers and the computer equipment in the last year whereas the price of the computer games has risen considering the flourishing demand of the computer games not only in UK but also globally (Yépez-Garcia and Dana, 2012). In this way, the fall in oil price is motivated in both directions for the deflationary condition of UK economy.

Conclusion

There is a significant impact of the fall in price of the oil in the overall economic activities of UK because the oil price can affect most of the business activities of each country basically which business are typically dependent on the oil as an input (Bird and Bird, 2007). The fall in oil price affects different economic factors like, GDP, employment, inflation rate, change in tax rate etc. in our analysis the main focus was on the effect of tax cut and deflation specifically. The comparative conclusion between these two is very much interesting. According to Manning (2011) both the deflationary situation and the tax cut are influenced by the fall in price of oil and the effect is not so narrow but broad and multi-dimensional. In summary it can be concluded that most of the sectors of UK economy is positively affected by the fall in oil price from the perspective of the households and the government as well. The only uncertainty relies on the difference in the scale of the benefits depending on the evolution of the oil prices in different sectors of the economy.

 

References

 

Books

Armaroli, N. and Balzani, V. (2011). Energy for a sustainable world. Weinheim, Germany: Wiley-VCH.

Bird, G. and Bird, G. (2007). An introduction to international macroeconomics. New York: Palgrave.

Henstock, M. (2013). The Recycling and Disposal of Solid Waste. Burlington: Elsevier Science.

Hogan, W. and Sturzenegger, F. (2010). The natural resources trap. Cambridge, Mass.: MIT Press.

Yépez-Garcia, R. and Dana, J. (2012). Mitigating vulnerability to high and volatile oil prices. Washington, D.C.: World Bank.

Zeng, D. (2012). Advances in control and communication. Berlin: Springer.

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Dissou, Y. (2010). Oil price shocks: Sectoral and dynamic adjustments in a small-open developed and oil-exporting economy. Energy Policy, 38(1), pp.562-572.

Heydová, J., Maitah, M. and Hammad, F. (2011). The Reasons and the Impacts of Crude Oil Prices on World Economy. European Journal of Business and Economics, 2(0).

Maeda, A. (2008). On the Oil Price-GDP Relationship. Japanese Economy, 35(1), pp.99-127.

Manning, D. (2011). Petrol prices, oil price rises and oil price falls: some evidence for the UK since 1972. Applied Economics, 23(9), pp.1535-1541.

Oladipo, O. (2013). Oil price shocks and macroeconomic activities: evidence from an oil dependent exporting economy. International Journal of Business and Emerging Markets, 5(3), p.199.

UK Assessment - The impact of the rise in oil prices on the UK economy. (2012). Economic Outlook, 25(1), pp.5-9.

Webster, A. and Ayatakshi, S. (2013). The effect of fossil energy and other environmental taxes on profit incentives for change in an open economy: Evidence from the UK. Energy Policy, 61, pp.1422-1431.

XIAO, Z. (2009). Competition, Public Choice, and Institutional Change: Searching for Reasons for Improved Policy Efficiency in Institutional Reform from "Managing Large Enterprises and Cutting Small Ones Loose". Chinese Economy, 39(1), pp.5-73.