The Economic History of UK - Assignment Example

1) Introduction The overall objective of macroeconomic policies is always the achievement of desired level of growth, price stability as well as thereduction of unemployment. The recent financial crisis however, affected most of the economic variables and governments were forced to take measures which were considered as essential for ensuring that economy is on track and that the declining trends are curbed. The government of UK has recently taken probably few of the most important steps in the economic history of UK to make sure that future growth prospects are secured. These measures were taken as a part of government’s austerity measures in the wake of rising government debt and the widening budget deficit. Some of the measures taken by the government included increase in Value Added Tax, systematic reduction in the general benefits provided to the people as well as reduction in the government expenditure besides taking other measures to ensure that the different macroeconomic objectives are fulfilled. George Osborne, man behind the recent measures taken by the UK government basically attempted to provide a radical program which can ensure that UK’s overall credit rating is improved amid the talks of country’s bankruptcy owing to mountains of debts which country accumulated over the period of time. In this part of the question, a discussion will be provided regarding the overall success of the measures taken by Bank of England and British Government since 2008 till date. Special emphasis will be on measuring and discussing the impact on growth, price stability, unemployment as well as the balance of payments. Steps taken by British Government from November 2008 to November 2010 At the start of the financial crisis in later part of 2007, British Government, attempted to inject money into the system in order to ensure that the institutions do not fail and that the economy remains on the path of recovery after the decline. Bank of England (BoE) drastically reduced the base interest rate in order to stimulate the consumer spending and generate the required level of demand in the economy. During November 2008, Alistair Darling took radical measures to reduce the VAT however; the overall borrowing by the government was increased. Reduction in VAT was aimed at reducing the general price level and ensuring that the people spend so that employment can be generated and aggregate demand can be increased. However, the steps taken by Labor Government, from November 2008, also involved increasing the national insurance contribution as well as the increase in taxes for higher earning individuals. Besides, labor government also took the decision of increasing taxes on items like Tobacco, Alcohol and petrol in order to offset the impact of VAT reduction. Labor Government also planned to take the measures to inject almost 20 Billion Pounds in the economy as a part of the stimulus plan to ensure that economy remains on track.1 However, after the elections of 2009, Labor government went out of the Government and conservatives took entirely different macroeconomic approach i.e. contractionary fiscal policy in order to achieve the macroeconomic variables. Some of the steps taken by the new Conservative Government involved drastic plans for the reduction in the government spending in order to reduce the debt burden. Conservative government not only unveiled systematic plans to reduce the welfare benefits to the people but also announced the measures to reduce the government spending. These measures also included reduction in number of jobs in public sector as well as increase in the working age in order to ensure that people do not remain on the government support. The monetary policy adapted by Bank of England has been an expansionary monetary policy wherein interest rates have been deliberately kept low in order to ensure that the consumer credit uptake is higher. Apart from keeping the interest rates at low, BoE also consciously adapted the policy of quantitative easing in order to ensure that money supply in the economy remains at levels which could sustain the recovery and continue to provide necessary stimulus to the economy. The practice of quantitative easing was also done with the purpose of keeping inflation in check.( Dale, 2009). It is also critical to note that before these measures were implemented, there was a general debate whether these measures will take UK out of the recession or they may create an era of mass unemployment in the country and consistent decline in the economy activity over a sustained period of time.( Blanchflower, 2010). Next section will therefore discuss whether these policies were successful in bringing the economy of country out of the rescission or not? How successful were these measures? Source: Office for National Statistics2 The above graph depicts the changes which took place in the GDP Growth of country over the period of last five years or so. The graph indicates a slower recovery in the economy from the second quarter of 2009 indicating that the measures taken by the British Government were successful in increasing the growth prospects of the economy. Economy grew by 0.8% during the third quarter of 2010 further consolidating the beliefs that austerity measures undertaken by Current government. Statistics further indicate that from last quarters of 2009 and the current year indicates that the employment level in the country rose too. During this period, employment level increased by 0.4%3 however, most of the employment was generated through part time employment. What is also critical to note that the full time employment actually reduced during this period indicating relatively strange changes in the employment level. It is also important to note that inflation has remained one of the concerns for the government because due to keeping the inflation at artificially lower level, there are pressures on the general price level. Source: Office for National Statistics The above graph indicates that the inflation in the economy has started to increase from the third quarter of 2009 however; it has seemed to stabilize during the current year. A closer look at the trends would suggest that due to policies of BoE inflation was contained since 2008 till third quarter of 2009. Data also indicate that the trade balance of the country is narrowing down owing mostly due to surplus on the trade of services. However, the trade balance in terms of goods further widened indicating the dependence of UK on the import of goods. The above discussion therefore indicates that the UK economy is recovering and the steps taken by the government since November 2008 seem to provide the desired results. (Pimlott, 2010). What is however, critical to note that there are still inflationary pressures on the economy and there is a general perception that inflation in the economy may increase. There is also a discussion that the actual impact of the actions taken by the Conservative Government specially will start to appear later and as such economy may further plunge owing to the austerity measures taken by the Government including deep spending and welfare cuts. Questions#2 In order to critical evaluate the macroeconomic policies adapted by UK government since 2008, we need to actually discuss two sets of policies adapted during that period. Since there was a government change in the country in 2009, therefore the period under study covers two different approaches adapted by two British governments in managing the economy and ensuring that it is on the path of recovery. The first part therefore will discuss the policies undertaken by Labor government till the election and subsequent discussion will be made for the policies undertaken by the current government of David Cameron. Macroeconomic policies under Labor Government In November 2008, the government of Gordon Brown announced different measures to manage the economy and achieve the necessary recovery targets. Policies adapted by Labor government were mostly based on the fiscal expansion combined with the monetary policy of similar nature. During the month of November 2008, government apparently adapted a expansionary fiscal policy wherein it drastically reduced the VAT and borrowed heavily to provide the required level of stimulus to the economy. Government also announced to take the measures for developing new counsel housing units in order to provide housing to those whose houses were repossessed owing to the credit crunch. The building of new counsel housing units therefore is considered as one of the steps which indicate towards the fiscal expansionary policy of the government. Under expansionary fiscal policy regimes, interest rates tend to increase due to higher government borrowing. This also creates the crowding out effect in the economy also as more and more credit goes to the government. This therefore creates crowding out of the credit to private sector and the private sector may not grow as expected. Bank of England also adapted an expansionary monetary policy during the Labor government as it continued to push for the quantitative easing as well as keeping the interest rates at deliberately lower levels. Low interest rates therefore ensured that the there is higher money supply in the market in order to ensure that the consumer spending remain at sustained levels in order to generate and maintain the aggregate demand levels. During this period, there were no conscious efforts to adapt supply side policies as due to overall gravity of the situation, governments, all over the world, adapted the demand side policies. Markets were probably closed watched in order to ensure that key institutions receive critical support to maintain the stability in the market. Policies during Conservative Government The new government of David Cameron took over the power in mid of 2009 however, the kind of macroeconomic policies adapted by the government were complete reversal of the earlier policies. Government adapted the policy of fiscal contraction wherein it started to slowly withdraw the government benefits and spending cuts besides increasing the taxes. This was apparently done in order to reduce the government debt however; the policies resulted into the social unrest also. Strikes by British Airways etc indicated the overall response of the general public towards the job cuts as a result of the austerity measures taken by the government. Contractionary fiscal policies often result into the suppression in the aggregate demand because government systematically reduces its expenditure and allow the market to work on its own. Further, the systematic reduction of the government expenditure also lessen the impacts of crowding out effects in the market thus giving more opportunities to the private sector to get a better access to the credit. Improved credit supply to the private sector therefore is one of the reasons as to why the contractionary fiscal policies often result into slow recovery of the economy over the period of time. It is also important to note that during this period, Bank of England continued to adapt the policy of monetary expansion and continued to keep the interest rates down. It also focused on the continuous quantitative easing process in order to ensure that money supply remains adequate to ensure the recovery in the economy. Thus the overall policies adapted by the government were based on the demand side policies however, the steps taken specially during 2009 indicates towards the reduction in the government spending and radical changes in the way UK economy was managed in the past. Conclusion The above discussion indicates that during a span of 2 years, UK adapted two different aspects of demand side policies. During the labor government, more emphasis was on increasing the role of government in the economy and government announced fiscal expansion measures to stimulate the economy. However, the new Conservative government undertaken contractionary fiscal policies and focused on reducing the government expenditure besides taking other measures such as increase in tax rates etc. The recovery of economy has been slow during this period as the economy is showing slow recovery with few concerns in different macroeconomic variables. Inflation is one of the concerns for the government as it is increasing consistently. With the government’s announcement for freeze on pay of public sector employees, increasing inflationary pressures may de-track the economy and UK may face difficult economic conditions in future. References 1) Abel, A, Bernanke, B (2000). Macroeconomics. 4th. ed. New York: Addison Wesley. 2) Blanchflower, D (2010). Flipping Tory policies prove a flop.. New Statesman. 139 (4987), pp.17. 3) Dale, S (2009). Tough times, unconventional measures [online]. [Accessed 9th November 2010]. Available from: . 4) Darling unveils borrowing gamble [online]. (2009) [Accessed 8th November 2010]. Available from: . 5) Hopkins, K (2010). Britains economy faces slow recovery [online]. [Accessed 9th November 2010]. Available from: . 6) Pimlott, D (2010). Small steps on path towards growth [online]. [Accessed 9th November 2010]. Available from: . Read More