Difficulties Governments Face in Developing Macroeconomic Policies - Essay Example

?A: Difficulties governments face in developing macroeconomic policies Although governments may face innumerable problems in macroeconomic policymaking, I will only focus on three major issues. Structural difficulties An economy comprises numerous interrelated variables and sectors. A change in one variable or sector will eventually affect the others, positively or adversely. Therefore, there is no accurate way to calculate the overall effect of a policy on macroeconomic level. This complex interrelationship is the major difficulty in developing macroeconomic policies and choosing the most appropriate policy among alternatives. Political Governments also face political constraints in developing economic policies. For instance, opposition parties, to gain sympathy and expand their vote bank, tend to become champion of popular demands which may adversely affect the overall economy. They sometimes simultaneously demand reduction in unemployment and inflation and stability of currency. However, in reality, reducing inflation will automatically result in an increase in unemployment. Therefore, sometimes governments are forced to take incoherent macroeconomic decision. Global The global economy is so interlinked that no nation can develop macroeconomic policies without considering the other economies. Even then, the global economy due to its complex nature, is not always predictable. For example, Chinese Premier Wen Jiabao had warned last year that China's macroeconomic control policy was facing “mounting difficulties with the severity of the international financial crisis and the unpredictable nature of the global economic recovery” (English.news.cn, 2010). Despite a good economy at home, China’s economic policy has been badly affected by unfavourable global trends. B: How such difficulties impacted UK’s economic policy since 2008 The UK’s economy was the last among major economies to recover from the global recession in the beginning of 2010, almost a little less than a year after Germany, France, the United States and Japan got away with it. It proves the confusion among policymakers on finding a way out of the longest-ever recession in the UK. When the recession struck the UK and rest of the world in 2008, the British government, like others, was unable to comprehend the accurate reason behind the crash, of course due to the complex interrelationship of several variables and sectors. Believing that the recession was caused by market failure, the UK government moved to regulate the market dynamics. It cut interest rates, increased government spending, multiplied money supply and nationalised a great deal of the banking sector. However, a large number of respected economists believed that the recession was not caused by market failure, but by government failure; thus, such regulation would only worsen the situation. Such is the complexity of the structure of an economy (Verdict on the Crash, 2010). The Bank of England’s decision of “Quantitative easing”, under which The Bank decided to purchase ?75 billion of assets to boost economy and stabilise inflation rate (Grahame Allen, 2010), has hardly yielded any result. With the policy announced on 5 March 2009, the inflation rate was still 4 per cent in January 2011, while the Bank of England’s target is 2 per cent. This was, as officially admitted (Economic Indicators Update, March 2011), due to an increase in the VAT rate. The sub-prime crisis in the US had affected the UK economy. Due to the purely free nature of the financial sector, mortgages secured in the US sold on throughout the world, including UK. Now the UK government, for sure, had not predicted this happening while developing their macroeconmomic policies. However, this was one of the main reasons why the credit crunch in the US actually overlapped into UK. During last few months, the Conservative Party government has been facing fierce resistance from the opposition, Labour Party, over its decision of cutting government spending, fearing that this could kill off recovery. However, Cameron believes that the UK had been too reliant on government spending despite the fact that “we have got to be more reliant on manufacturing and investment.” (BBC, March 7 2011) I am not suggesting that Cameron’s decision of paying off the budget deficit will help boost the economy – only time will testify this – but what am I trying to argue is that sometimes governments have to withdraw important decisions due to political resistance. For example, the Liberal Democrats had been in support of the Digital Economy Act, but they had to switch their position after public pressure (TechDirt 2010). C: The impact and effectiveness of UK’s economic policy since 2009 I believe, and there is enough evidence to believe so, that most of the government decisions since 2009 have failed to stabilise the UK economy. As the recession hit the UK, what the government did was to “spend its way out of recession” (Matthew Lynn, February 2001). Lynn puts it in this way: “Short of digging Karl Marx out of his London grave, and putting him in charge, it is hard to see how the state could get more involved in the economy.” In 2009, government spendings were multiplied, interest rate slashed only to boost growth. The economy in fact grew –albeit only by 0.1 per cent -- during the last quarter of 2009, but only to shrink in the last quarter of 2010 (BBC, March 7, 2011). Besides, the slashed interest rates and increased money supply have resulted in an inflation rate of 4 percent; thus affecting each and every household with skyrocketing prices. It was partly because of such unwise decisions that Labours were ousted from power last year after 13 years in power. Personally, I’m with Cameron on the point the UK has been too dependent on government spending too boost growth and gain economic stability. Now, with the government’s austerity measures and more focus on investment and manufacturing, the unemployment rate will hopefully decrease and prices stabilised, to some extent. Despite a sales tax increase and plans of more spending cuts, “the most recent data suggest the private sector expanded in January” (Laurence Norman, 2011) this year. However, again, the present government’s policies are not without flaws. It has gone too far in paying off the deficit. Its policies of tripling of the cap on university tuition fees and withdrawal of allowances will badly hit the middle-class section of the British society and likely deepen the rich-poor gap. Between these two extremes of the Labours and Democrats, a more balanced approached should adopted on government spending issue. Although the British Chamber of Commerce has predicted a less-than-expected growth rate this year –citing austerity cuts, increased VAT rates and eurozone debt crisis—it’s optimistic that the economy is robust enough to avoid slipping back to recession (BBC, December 2010). However, it has upgraded its GDP growth forecasts for 2012 from 1.8% to 2.1% because of private sector growth which is all possible due to the renewed focus of the present government on investment and enterprise. To conclude, the UK had been on the wrong path visa-a-vis its economic polices throughout the recession. However, with its new polices, there are hopes that its economy will stabilise, though gradually, by 2012. E: Bibliography 1. BBC, March 7, 2011. Cameron urges economy 'rebalance' to restore growth. URL: http://www.bbc.co.uk/news/uk-politics-12665344. [Accessed 15th March 2011] 2. BBC, 2011. Cameron urges economy 'rebalance' to restore growth. URL: http://www.bbc.co.uk/news/uk-politics-12665344. [Accessed 15th March 2011] 3. BBC. December 2010. UK economy growth to slow in 2011 - Chambers of Commerce. URL: http://www.bbc.co.uk/news/uk-11920548. [Accessed 15th March 2011] 4. Economic Indicators Update, March 2011. URL:http://hcl1.hclibrary.parliament.uk/wdw/subject/ei.asp. [Accessed 15th March 2011] 5. English.news.cn, 2010. China's economic policy faces mounting difficulties: Premier Wen. URL: http://news.xinhuanet.com/english2010/china/2010-07/04/c_13383150.htm. [Accessed 15th March 2011] 6. Grahame Allen, February 2010. Quantitative easing. House of Commons Library. Pp. 1. 7. Laurence Norman. The Wall Street Journal. 2011. U.K. politicians clash over economy. URL:http://online.wsj.com/article/SB10001424052748704709304576124131721666922.html. [Accessed 15th March 2011] 8. Matthew Lynn, February 2010. Deathbed of Keynesian economics will be in U.K. Bloomberg. URL:http://www.bloomberg.com/apps/news?pid=email_en&sid=a5t.xQdllnbo. [Accessed 15th March 2011] 9. TechDirt. 2010. UK Politicians Looking To Repeal Digital Economy Act. URL: http://www.techdirt.com/articles/20100518/0900499464.shtml. [Accessed 15th March 2011] 10. Verdict on the Crash, 2010. Institute of Economic Affairs (The book was written by 14 respected authors) Read More