The document discusses the fall in oil prices in the UK economy from mid-2014 and its potential impacts as either a result of large tax cuts or a contributor to deflationary economic conditions. It analyzes how the fall in oil prices boosted UK GDP growth and benefited households and government revenues despite losses in the oil and gas extraction sectors. The UK government implemented further tax cuts on the oil and gas industry to offset losses from lower global prices. While lower inflation resulted from cheaper energy costs, prolonged low inflation could increase the risk of deflation in the UK economy.

1. The recent fall in oil prices – Either an impact of a big
tax cut or a contributor to potential deflation
A Case Study of UK Economy

2. 1
Table of Contents
Introduction .......................................................................................................................................2
Fall in Oil Prices in UK Economy........................................................................................................2
Fall in Oil Prices and Tax Cut..............................................................................................................4
Fall in Oil Prices and Deflationary Economic Condition........................................................................5
Conclusion.........................................................................................................................................6
Works Cited.......................................................................................................................................7

3. 2
Introduction
It is a universal truth that there is a significant impact of the change in oil price in the world
economy. This impact was also present in the UK Economy where the price of oil started to
decline since mid-2014. There are several factors like cut in tax rates, deflation or fall in general
price level, etc. which were affecting the fall in oil price in the UK (EBRAHIM, et al., 2014). In
this analysis, these two reasons, present behind the fall in oil price, is going to be discussed on
the ground of the UK economy based on the Economist article, viz., “British Monetary Policy/
The Wrong Target?” published on 15th Feb 2015. The following issues will be discussed in this
analysis – the steps for affecting the decline in oil price in UK economy because of the large
amount of tax cut and the deflationary economic condition; the winners and the losers of this
economic phenomenon; and the structure of changes affecting the trade balance, government
revenues etc. of the UK economy.
Fall in Oil Prices in UK Economy
According to Stern, the global fall in oil price has a 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 take steps to help the companies providing the tax breaks since June 2014. The
forecasting of the Bank of England has shown that the 2.9 percent growth was there in the UK
economy in 2015 and it was the fastest growth rate of the economy (Stern, 2015). Therefore, the
overall economic activity of UK is boosted because of the fall in production cost in the
industries, especially depending on the oil related inputs since June 2014. Although the oil and
gas extraction sectors, coke and refined petroleum manufacturing sectors are affected inversely
due to the fall in oil prices (Bawden, 2015). But, there is a chance of making benefit also for the
sectors which are intensive in reallocation of the resources like capital, land, etc. The model of
UK economy is utilised here to quantify these effects rigorously and critically. In the analysis of
Stern it is explained that the GDP of the UK economy increased by 1% on an average due to the
permanent reduction in oil price. The settlement of this price was at $50 per barrel to the baseline
in between 2015 and by 2020, there will be a positive impact in the employment generation of
UK as the result of this economic policy (Stern, 2015).
Figure 1 shows the transmission mechanism due to the fall in oil price is analysed below.

4. 3
Figure 1: Oil Price Fall in Transmission Mechanism
(Anon., 2015)
In the writing of Lorusso & Pieroni 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 was
unanticipated and unexpected too and so, this phenomenon was overlooked during the monetary
policy implication (Lorusso & Pieroni, 2015). But he also told that there was a real boost in the
GDP of the UK from 0.2% to 0.5% for this quick change in oil price (Bawden, 2015). The rise in
total income of the households shoot up their spending and the two factors behind this are – rise
in real wage and fall in the price of the cost of savings. The tax revenue of the government is
increasing due to the growing economic activity from their personal as well as the corporate
taxes that exceed the total revenue from the oil and gas sector after the fall in the price of the
government (EBRAHIM, et al., 2014). As a result, there is a small but effective impact in
narrowing the deficit in trade of UK economy.

5. 4
Figure – 2: Revenue from the oil and gas sector in UK Economy
(pwc, 2015)
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
offsetting the fall in global oil price (Bowler, 2015). According to him, the decision is taken for
the reduction in the tax rates on North Sea oil in the autumn statement. The Chancellor has
anticipated that there might be a pressure of the fall in oil price in other industries of UK.
Therefore, further steps in the budget would be taken by Mr George Osborne. He was also proud
to announce that those rustic steps in the budget were taken to pool the anticipated risks
(Klevnäs, et al., 2015).
The phenomenon of fall in oil price is so much beneficial for the UK economy. The government
of UK is very much supportive of the robust independent analysis of the public finance of the
country (Klevnäs, et al., 2015). Another positive side of this hike of oil price can be recognised
in the requirement procedure of Office for Budget Responsibility. According to the Office for

6. 5
Budget Responsibility, this price hike worked in the provision of independent economic
forecasts which are also taken in front of the analysis of developing new economic power.
The point of view of Baffes, et al. about this phenomenon was that the objective of the cut in the
tax rate on the oil and gas production was the safety of the industry from the “pressing danger”
created by the fall in oil price (Baffes, et al., 2015). The new measures, taken regarding this
issue, were off 1.3 billion euros to boost up the flagging oil production in the North Sea at the
end of this decade. The reduction of the tax rate is effective at different rates in the new as well
as old fields of oil and gas production. In the case of older fields, the reduction was done from
80pc to 75pc whereas, is a case of newer fields, the tax rate cut was from 60pc to 50pc (Bowler,
2015). 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 the tax rate.
Fall in Oil Prices and Deflationary Economic Condition
The price war in the ongoing supermarket and the fall in the price of petrol brought the inflation
rate in the UK down to just 1 percentage in October 2012 (EBRAHIM, et al., 2014). Husain, et
al. had expected the drop back of the consumer’s prices index inflation would be from 1.2
percent to 1.3 percent and the Office for National Statistics (ONS) had also shown that there
might be a fall in the cost of living (Husain, et al., 2015). According to few Economists, the price
of petrol will go down by two-third of the present price in this plunging oil price season of the
world (Anon., 2015). If the inflation rate can be brought below the level of 1 percentage, 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 pressure on the
Bank (Klevnäs, et al., 2015). This percentage can be reduced also to raise the rate of interest
(Klevnäs, et al., 2015).
There is a vast range of energy-intensive goods of which the cost of production must come down
due to the fall in the price of oil. At the end of June 2014, the price of Brent crude oil had
remarkably plunged below $60 starting from $115 (pwc, 2015). As per (), there is a strong effect
of the fall in petrol price in the inflation rate of the next month (). There is an expectation
regarding the steady pick-up in the growth of wage rate and a declining trend in the employment

7. 6
pattern of the UK economy in the coming six months of the year. For this reason, 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 (Lorusso & Pieroni, 2015). Since 2002, the
steepest drop down in price was taken place in the month of November of 2014 of the
commodities like food and non-alcoholic beverages. This fall was by 1.7 percent in the last year,
2014. The fall in the 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 the cut in the price of the imports (Lorusso &
Pieroni, 2015).
According to LUSKIN, an inflation rate of 1 percent or below reacts as the threat as because it
can bring the UK economy closer to the condition of damaging deflationary spiral which is
found in the Eurozone scenario (LUSKIN, 2015). 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 the UK for last six years. The ONS data has shown that a fall in the price of
airfare and second-hand cars. Also, a drop down is 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 for the computer games not only in the UK but also globally
(Husain, et al., 2015). In this way, the fall in oil price has worked in both directions for the
deflationary condition of UK economy.
Conclusion
There is a significant impact of the fall in the price of the oil in the overall economic activities of
UK. The oil price can affect most of the business activities of the country directly. 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 the tax cut and deflation. Therefore, the
comparative conclusion between these two effects can be drawn in a very much interesting way.
The fall in the price of oil influences both of the deflationary situation and the tax cut and the
effect is not narrow but multi-dimensional. In summary, it can be concluded that most of the
sectors of UK economy are 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

8. 7
of the benefits received. These benefits depend on the evolution of the oil prices in different
sectors of the economy.

9. 8
Works Cited
Anon., 2015. Understanding the Plunge in Oil Prices:Sources and Implications. GLOBAL ECONOMIC
PROSPECTS , III(1),pp. 155-167.
Baffes,J.,Kose, M. A., Ohnsorge, F. & Stocker, M., 2015. The Great Plunge in Oil Prices:Causes,
Consequences, and Policy Responses, s.l.:World Bank Group.
Bawden,T., 2015. Oil price crash: How the industry'sdecline will affect the UK economy. [Online]
Available at: http://www.independent.co.uk/news/business/news/oil-price-crash-how-the-industrys-
decline-will-affect-the-uk-economy/
[Accessed 21 August 2015].
Bowler, T., 2015. Falling oil prices: Who are the winnersand losers?. [Online]
Available at: http://www.bbc.com/news/business-29643612
[Accessed 21 August 2015].
EBRAHIM,Z., INDERWILDI,O. R. & KING,D. A., 2014. Macroeconomic impactsof oil price
volatility: mitigation and resilience, Berlin: Higher Education Press and Springer-Verlag.
Husain, A. M. et al., 2015. IMF: Global Implications of LowerOil Prices. [Online]
Available at: https://www.imf.org/external/pubs/ft/sdn/2015/sdn1515.pdf
[Accessed 21 August 2015].
Klevnäs, P., Stern, . N. & Frejova, J., 2015. OIL PRICES AND THE NEW CLIMATE ECONOMY. THE
NEW CLIMATE ECONOMY, May,I(1),pp. 1-20.
Lorusso, M. & Pieroni, L., 2015. Causes and Consequences of Oil Price Shocks on the UK Economy.
CEERP Working PaperNo. 2, II(4),pp. 1-32.
LUSKIN,D. L., 2015. The Recession Caused by Low Oil Prices. [Online]
Available at: http://www.wsj.com/articles/the-recession-caused-by-low-oil-prices/
[Accessed 21 August 2015].
pwc, 2015. UK Economic Outlook March 2015: The impact of loweroil prices on the UK economy.
[Online]
Available at: http://www.pwc.co.uk/assets/pdf/ukeo-oil-prices-march-2015.pdf
[Accessed 21 August 2015].
Stern, J., 2015. The Impact of Lower Gas and Oil Prices on Global Gas and LNG Markets. The Orford
University For Energy Studies, III(32),pp. 1-60.