Great Britains Economy between 2011 to 2012 - Essay Example

Great Britain’s Economy between to ID Number Total Number of Words: 2,001 Table of Contents Introduction ............................................................................................................... 3 2. Ability of the British Government and Bank of England in Managing the British Economy between 2011 and 2012 ................................................................ 3 2.1 Unemployment Rate .................................................................................. 3 2.2 Gross Domestic Product (GDP) ................................................................ 3 2.3 Balance of Payment .................................................................................. 4 2.4 Price Stability ............................................................................................ 5 3. Macroeconomic Policies of the British Government and Bank of England ............ 6 3.1 Fiscal Policy .............................................................................................. 6 3.2 Monetary Policy ........................................................................................ 7 4. Conclusion and Recommendations .......................................................................... 9 References ........................................................................................................................... 10 - 12 Appendix I – Historical Trend: Unemployment Rate in UK .............................................. 13 Appendix II – Historical Trend: GDP ................................................................................. 14 Appendix III – Historical Trend: Current Account Balances ............................................. 15 Appendix IV – Historical Trend: Trade in Goods and Services ........................................ 16 Appendix V – Historical Trend: Inflation Rate .................................................................. 17 Appendix VI – Summary of British Government Expenditures as of 2011 ...................... 18 Appendix VII – Historical Trend: UK Government Borrowing and Debt ........................ 19 Appendix VIII – Historical Trend: UK Interest Rates ....................................................... 20 1. Introduction Both the government’s fiscal policy and the central bank’s monetary policy can be used in managing a country’s economic performance. Taking this into consideration, this report will focus on discussing the strategies used by both the British Government and the Bank of England in terms of running the British economy over the last two years. As part of the main discussion, this report will describe and evaluate the main macroeconomic policies used by both the British Government and the Bank of England. Furthermore, real-life economic situations that occurred in UK between 2011 to 2012 will be tackled in details. 2. Ability of the British Government and Bank of England in Managing the British Economy between 2011 and 2012 The ability of the British Government and Bank of England to manage the British economy can be closely monitored by carefully observing and analyzing the historical trend of UK’s unemployment rate, gross domestic product (GDP), balance of payment, and price stability. 2.1 Unemployment Rate Between 2011 and 2012, the unemployment rate in UK remains as high as 8.02% and 8.13% respectively (Statista, 2013a). The fact that the unemployment rate in this country has increased by 0.11% is already a sign that the economy of UK has not really been good after all. (See Appendix I – Historical Trend: Unemployment Rate in UK on page 13) 2.2 Gross Domestic Product (GDP) Gross domestic product (GDP) is “the market value of all final goods and services produced within a country in a given period of time” (Mankiw, 2012, p. 494). It means that UK’s yearly GDP can be used to closely monitor the actual economic activities that had taken place in this country (Office for National Statistics, 2013a). Based on the current market prices, GDP in UK has somehow been showing a flat trend between the 1st and 2nd quarter of 2011 and the 3rd quarter of 2011 to the 2nd quarter of 2012. During the 4th quarter of 2012, the GDP of UK has declined by 0.3% as compared to the previous quarter (Bank of England, 2013; Office for National Statistics, 2013b). Basically, the sudden decrease in domestic demand, the presence of the Olympic and Paralympic Games, and the sudden reduction of the North Sea oil output explains why the GDP fell by 0.3% during the last quarter of 2012 (Bank of England, 2013; Office for National Statistics, 2013b). (See Appendix II – Historical Trend: GDP on page 14) 2.3 Balance of Payment Balance of payment provides the “summary of transactions between domestic and foreign residents for a specific country over a specified period of time” (Madura, 2010, p. 27). It means that the balance of payments would show the summary of import and export of goods and services including the financial transfers between UK and other countries (Sloman, 2004, pp. 516 – 517). There is a huge deficit in UK’s current account balances. Based on the latest report that was released by the Office for National Statistics, “UK’s current account deficit was £57.7 billion” as of 2012 (Office for National Statistics, 2013d). Although there was a slight increase in the total trade, income, and transfers in UK between the 2nd quarter and 4th quarter of 2012, UK still have a deficit of almost £15 billion as of the last quarter of 2012 (Office for National Statistics, 2013c). (See Appendix III – Historical Trend: Current Account Balances on page 15) Based on the figures and historical graphs as provided by the Office for National Statistics (2013c, p. 6), UK’s total trade in goods has long time been negative. It means that the only thing that is pulling up UK’s balance of payment is its trade in goods (Office for National Statistics, 2013c). (See Appendix IV – Historical Trend: Trade in Goods and Services on page 16) 2.4 Price Stability Consumer price index (CPI) is all about the average prices of goods and services purchased by each family or household in UK (Brux, 2008, p. 339). On the other hand, inflation rate is all about the levels of price increase in goods and services (Doty and Turner, 2009, p. 64). In most cases, CPI is used not only to determine people’s estimated cost of living but also to measure the rate of inflation (Tucker, 2011, p. 184). Each time inflation rate is high, it means that both the British Government and the Bank of England has failed to maintain price stability throughout Great Britain. Although CPI inflation rate was maintained between 4.0% to 4.5% level during the first half of 2011, CPI inflation rate in UK was at the highest in September 2011 at 5.2% (BBC News, 2013a). The high CPI inflation rate in UK was decreased from 3.4% in February 2012 to 2.4%, and 2.2% in June, and September 2012 respectively (BBC News, 2013a, 2012). Due to the significant increase in the market prices of fuel, inflation rate in UK was up to 2.8% again in February 2013 (BBC News, 2013b). (See Appendix V – Historical Trend: Inflation Rate on page 17) 3. Macroeconomic Policies of the British Government and Bank of England 3.1 Fiscal Policy The fiscal policy is often used to control both taxation and government spending. For instance, the British government can somehow indirectly increase its GDP or lower its unemployment rate by using its fiscal policies to either increase or lower its tax collection, print or borrow money (Goodwin, Nelson and Harris, 2009, pp. 236 – 239). Basically, the main purpose of controlling UK’s taxation and government spending is to make the British government able to reach their preferred macroeconomic goals (Economics Online, 2013). The British government expenditure back in 2011 has reached a total of £689.2 billion (HM Treasury, 2011). In case the tax collection is low, the British government has the option to borrow money upon issuing government bonds or print more money (Goodwin, Nelson and Harris, 2009, p. 239; Wessels, 2006, p. 185). By doing so, the British government will not only be able to create more job opportunities by increasing its government spending but also to meet the government’s usual expenditures. (See Appendix VI – Summary of British Government Expenditures as of 2011 on page 18; See Appendix VII – Historical Trend: UK Government Borrowing and Debt on page 19) As of August 2012, the total amount of taxes that was collected by the British government was 0.8% less as compared to the previous year (BBC News, 2012b). With regards to the question as to how successful the British Government has been in terms of running the British economy over the last two years, it is difficult to say that the British government’s decision to borrow between £125 to £126 billion between the fiscal year 2011 to 2012 is a very good fiscal strategy (BBC News, 2012b). Even though the British government can make use of the borrowed money as a financial/economic stimulus, its long-term economic consequences can seriously damage the entire British economy. In August 2012, UK’s total debt has already reached as high as £1,032 billion (BBC News, 2012b). The main problem with borrowing excessive money is that this particular fiscal policy option can only increase the long-term debt of the British government (Goodwin, Nelson and Harris, 2009, p. 239). As explained by Rachel Reeves – the chief secretary of the Treasury, excessive borrowing is not good because it can lead to a higher risk for “a double-dip recession” (BBC News, 2012b). At all times, the British government should make its budget balanced with its government expenditures; and that borrowing of money should be limited to financial capital spending (Adam et al., 2007). It simply means that the British government should avoid borrowing money just to cover up its government expenditures caused by its inability to collect sufficient taxes. Instead of trying to solve economic issues related to high unemployment rate, the British government should have just take a neutral position and allow the real economic situation to adjust its employment and unemployment rate. By doing so, the British government will be able to decrease and maintain its inflation rate at a very low level (Goodwin, Nelson and Harris, 2009, p. 239). 3.2 Monetary Policy Maintaining the price stability is the secret behind a stable economic growth (HM Treasury, 2011, p. 1). To manage the national reserves and maintain price and banks’ stability, the Bank of England (BoE) controls the interest rates, the money supply, and its circulation throughout the United Kingdom (Economy Watch, 2010). BoE tries to avoid high inflation rate by ensuring they have a tight control over UK’s money supply. Basically, what happens when the BoE tightens its control over the money supply is that its monetary purchasing power increases. Furthermore, this particular monetary policy is effective in terms of maintaining price stability in this country. Based on the two years historical trend on its inflation rate; BoE managed to bring down its inflation rate from 5.2% last September 2011 to 3.6% on January 2012 and 2.4% and 2.2% in June and September 2012 respectively. This figure strongly suggests that the BoE has somehow been successful in terms of managing the British economy. However, inflation rate in UK was up to 2.8% again in February 2013 (BBC News, 2013b). Therefore, the BoE should continuously exert more effort in trying to maintain its inflation rate at 2.0%. (See Appendix V – Historical Trend: Inflation Rate on page 17) Basically, the BoE’s decision to lower down inflation rate could somehow help solve the unemployment rate in this country. Given that inflation rate is high; there is a higher risk wherein people may end up demanding a higher salary from its employers. In the long-run, having a very high inflation rate would make it very difficult on the part of the business people to maintain their business operations in this country. The interest rate is also a part of the monetary policy. Normally, when the interest rate is set on a high level, more people will be encouraged to save their money in banks rather than use their money on investments. If people would end up keeping their money in the banks, it would be more difficult on the part of the British government to gather and generate more funds for future investment. This explains why the BoE decided to set its interest rate at 0.5% since March 2009 up to the present time (House Price Crash, 2013; Trading Economics, 2013). Therefore, by controlling the movement of interest rates, it is possible for BoE to maintain price stability throughout the United Kingdom. (See Appendix VIII – Historical Trend: UK Interest Rates on page 20) 4. Conclusion and Recommendations Between the macroeconomic policies used by both the British government and the Bank of England, the strategies used by the Bank of England are generally more safe and effective in terms of maintaining price stability and better economic situation throughout the United Kingdom. Although the fiscal policy used by the British government has been also effective in terms of being able to generate short-term funds to pay its government expenditures, the act of continuously borrowing large sum of money could eventually cause the entire British economy to suffer from a double-dip recession. To prevent the British economy from suffering the economic consequences of a double-dip recession, the British government should avoid making it a habit to borrow money just to cover up its monthly government expenditures. Instead, the British government should continuously find more ways on how this country could generate more tax collection from other sources. Tobaccos and alcoholic beverages are addicting substances and harmful to one’s health. Therefore, the British government may decide to increase the tax collection on these two product lines. In the case of BoE, it makes sense that the central bank should continuously strive hard to keep the inflation rate as low as possible. Most likely, the BoE should keep on targeting the 2.0% inflation rate. With regards to the interest rate, maintaining it at 0.5% is good enough to encourage more people to use their excess money for investment purposes. References Adam, S., Baker, M., Bond, S., Brewer, M., Browne, J., et al. (2007, January). The IFS Green Budget. [Online] Available at: http://www.ifs.org.uk/budgets/gb2007/gb2007.pdf [Accessed 6 April 2013]. Bank of England. (2013, February). Overview of the Inflation Report February 2013. [Online] Available at: http://www.bankofengland.co.uk/publications/Pages/inflationreport/infrep.aspx [Accessed 6 April 2013]. BBC News. (2013a, March 19). 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Appendix I – Historical Trend: Unemployment Rate in UK Source: Statista, 2013a Appendix II – Historical Trend: GDP UK GDP Q1 - 2011 107.0 Q2 - 2011 107.1 Q3 - 2011 109.2 Q4 - 2011 109.2 Q1 - 2012 108.8 Q2 - 2012 109.0 Q3 - 2012 111.2 Q4 - 2012 110.8 Source: Office for National Statistics, 2013b Appendix III – Historical Trend: Current Account Balances Source: Office for National Statistics, 2013c Appendix IV – Historical Trend: Trade in Goods and Services Source: Office for National Statistics, 2013c Appendix V – Historical Trend: Inflation Rate 2011 2012 January March June September January March June September 4.0% 4.0% 4.2% 5.2% 3.6% 3.5% 2.4% 2.2% Source: BBC News, 2013 Appendix VI – Summary of British Government Expenditures as of 2011 Source: HM Treasury, 2011 Appendix VII – Historical Trend: UK Government Borrowing and Debt Source: Riley, 2012 Appendix VIII – Historical Trend: UK Interest Rates Source: Trading Economics, 2013 Source: House Price Crash, 2013 Read More