Economic Growth in the UK - Essay Example

ECONOMIC GROWTH IN THE UK By of the of the of the School 17 November Introduction Economic growth is important as it leads to other freedoms such as better health and education in a nation. According to Iheduru, “economic growth deals with sustained economic increments in the total income or in the per capita income” (1999, p. 16). Although the economy of the United Kingdom suffered due to the 2008 economic crisis, the nation has gradually recovered. In 2014, the nation experienced the best economic performance since the last peak which was in the first quarter of 2008 (BBC, 2014). Economic growth is driven by a number of factors. In the United Kingdom, economic growth has been driven by investment in infrastructure, investment in science and technology, increased access to business finance, increased exports and support for inward investment, reduction of corporation tax, simplification in business regulations, educating the workforce, tackling long term housing market issues and government support for local growth. This paper discusses economic growth in the United Kingdom with particular focus on the causes of economic growth, longstanding policies and their effect on balanced economic growth and gives recommendations on how the United Kingdom can promote further economic growth. 2. Drivers of UK’s Economic Growth For nations to succeed in the competitive global economy, the respective governments must take action. The government of the United Kingdom has not been left behind. It has taken initiatives to encourage economic growth and at the same time, it continues to support hardworking citizens who want to succeed in life. For stable and continuous economic growth, the initiatives taken by the United Kingdom government include: 2.1. Investment in infrastructure A nation cannot run effectively without economic infrastructure. For this reason, the government of the United Kingdom has placed economic infrastructure development at the heart of its economic growth policies. Economic infrastructure not only promotes economic growth but also creates employment. Examples of economic infrastructure include construction of power plants, airports, railways and roads, and provision of support services such as security systems and street lighting. Over the years, the United Kingdom has developed its infrastructure networks. According to a finding by OECD, “between 1970 and 2005, investment in UK roads, rail and electricity generating capacity had a stronger positive effect on the level of GDP per capita, and on short term growth, than other types of capital investment” (HM Treasury and Infrastructure UK, 2010). In 2009, the United Kingdom government created Infrastructure UK, which is a new advisory unit within the Treasury with a mandate to “bring further focus to the government’s strategic work to ensure appropriate economic infrastructure is developed in areas like energy, waste, water, communications and transport” (Great Britain National Audit Office, 2013, p. 5). In the 2010 budget, the advisory unit was confirmed. The reason behing the taking of such steps by the United Kingdom government is that it realised that although it was making some investment in infrastructure, the investment was not enough especially for the growing population and swiftly growing global economy. Figure 1.0 shows infrastructure spending in the UK in shares among different regions. Figure 1.0: Cox, Ed, and Davies, B., 2014. Transformational Infrastructure for the North: Why we need a Great North Plan. [online] Available at: < http://www.ippr.org/read/transformational-infrastructure-for-the-north-why-we-need-a-great-north-plan#public-investment-in-infrastructure-and-uk-public-policy > [Accessed 18 February 2015]. 2.2. Investment in science and technology Science and technology are significant national investments for economic growth. Metcalfe supports this by pointing out that “in the past four decades, the relationship between science, technology and economic performance has rarely been off the agenda for public debate in the advanced industrial countries” (1998, p. 107). Constant innovation, which is driven by science and technology, is crucial for successful economies to stay undefeated among competitors. The United Kingdom government has made excellent progress in attaining and retaining an excellent global position in science, innovation and technology. To ensure that the United Kingdom stays ahead in science and innovation, “the Spending Round commits to maintain resource funding for science in cash-terms at £4.6 billion in 2015-16, as well as providing a real increase of £185 million in resource funding for the Technology Strategy Board (TSB) to support innovation” (Great Britain HM Treasury, 2013, p. 35). According to Great Britain HM Treasury, in 2013, the field of science received £0.6 billion funding by the UK government (2013). In 2015-16, the government plans to increase this amount to £1.1 million (Great Britain HM Treasury, 2013). 2.3. Increased access to business finance When businesses grow and jobs get created, prosperity or economic growth is experienced. All businesses whether small or large need access to finance in order to experience growth. Developing and dynamic SME sectors possess the potential to impact economic growth positively. Generally, when it comes to accessing finance, SMEs experience more difficulties compared to their larger counterparts. This usually happens due to the fact that most SMEs have no significant track record or credit history making them more risky. In the United Kingdom, majority of the businesses are small businesses and they contribute to about half of the overall employment. In the private sector, they make up a third of the total turnover. To support long and short term investment, the United Kingdom government has “increased the Annual Investment Allowance tenfold, from £25,000 to £250,000, for 2 years from January 2013”…and…“announced a £2,000 Employment Allowance to help businesses, especially small businesses, to expand by reducing the cost of employment from April 2014” (Great Britain HM Treasury, 2013, p. 44). 2.4. Increased exports and support for inward investment Exports and inward investment are two activities whose key roles in driving economic growth are recognised by the government of the United Kingdom. For this reason, it has taken steps to encourage exports and inward investment. Exports and inward investment boost productivity, innovation, research and development, and increase sales, profits and jobs. To ensure that UK companies develop their trading capacity and maximise their success in the international arena, the United Kingdom government created an organisation known as UK Trade and Investment (UKTI). According to Grant and Vidler, the UK “exports approximately 24 per cent of all the goods it produces and imports approximately 25 per cent of all the goods it consumes” (2000, p. 290). To encourage Foreign Direct Investment (FDI), the UK government is taking steps to make the financial arrangements of UKTI more flexible. This will motivate private sector providers. Additionally, the government has increased “the annual budget of UKTI by £70 million to deliver services to more small and medium size exporters and help to refocus UKTI activities on the highest value opportunities and emerging markets” (Great Britain HM Treasury, 2012, p. 39). 2.5. Reduction of corporation tax Taxation is a crucial tool for economic development. This is because it can be manipulated to stimulate economic growth. Corporation tax refers to tax charged on the profits of companies doing business in the UK or UK resident companies and clubs. Reduction in corporation tax is a fundamental tool in encouraging economic development. By reducing corporate tax by 10 per cent, it is suggested that “employment in the traded sector would rise by 8,000 and, as a direct consequence, 8,200 in the non-traded sector” (Ball, 2008, p. 17). In the 2010 corporate tax roadmap, the UK government highlighted major reforms that it aims to make to encourage investment and expansion by UK businesses and make the tax system more competitive. First, the corporation tax rate has been reduced from 28% in 2011 to 21% in 2014 and is expected to reduce further to 20% in 2015 (Great Britain HM Treasury, 2010). The small profits rate is also to be reduced to 20 % instead of being increased, corporation tax for the manufacturing sector will be reduced further in comparison to other sectors, and Annual Investment Allowance will also be gradually reduced (Great Britain HM Treasury, 2010). 2.6. Simplification in business regulation A complex regulatory system inhibits business performance consequently slowing down economic growth. For decades, the UK government has had an ambition to remove and simplify existing regulations. Since a new government took office in the United Kingdom in 2010, it has taken steps to reduce the businesses regulatory burden. According to the World Bank, these steps include “abolishing regulations that are seen as impeding growth, introducing new regulations only where there are no sensible alternatives and as a last resort, reducing the volume of new regulations and reducing regulatory costs for business” (2012, p. 35). 2.7. Educating the workforce According to Smith and Grant, “a better educated workforce is usually a more productive one” (2003, p. 3). The more productive a nation’s workforce is, the more growth it experiences economically. As the United Kingdom continues to advance as a nation, it requires autonomous, flexible and highly skilled and educated workers. To ensure that the general population is educated, the United Kingdom provides free education to its population till the university level. Although academic education has been made free and available, vocational education and training have been found to be equally important. To ensure that vocational education and training is improved, “emphasis has been switched from public/industry provision (for example, through the old training boards) to employer responsibility for training” (Reilly, 2001, p. 22). Investors in People (LiP) and National Vocational Qualifications (NVQs) have been introduced for this reason. National Vocational Qualifications are to be delivered and assessed in the workplaces and are aimed at increasing vocational qualifications. 2.8. Tackling long-term issues in the housing market A thriving housing market is a prerequisite for economic growth. For years, the UK housing market has faced issues such as affordability, changing system in terms of tenure, supply constraints and worry over the sustainability of cities. Owning homes for UK households has been a nightmare for a long term and the government has made a commitment to make home ownership for households a reality. In the 2010 Spending Review period, the United Kingdom government pledged to invest more than £11 billion in housing (Great Britain Treasury, 2013). According to Great Britain Treasury, from the First Buy, Help to Buy initiative, the government will provide up to 20 per cent equity loan out of the total amount required to build a new home and this will be repaid once the home is sold (2013). The eligibility criteria used to select people eligible to own homes has been widened and the scheme is open to everyone with an aspiration to move up the housing ladder and not just first-time buyers (Great Britain Treasury, 2013). 2.9. Support for local growth Local economies across a country make significant contributions to the overall national economy. For this reason, local economies need to thrive. Local growth is characterised by low crime rates, well conserved environments, proper health and availability of work. When local economies are static or declining, the result is an overall economic drag. The new coalition government in the UK has taken steps to promote local growth. This has been by “putting local partners in the driving seat-providing the right mix of incentives and tools to enable local residents, councils, businesses and civic organisations to regenerate and grow their areas as they see fit” (Great Britain Parliament, House of Commons, Communities and Local Government Committee, 2011, p. 170). 3. Long Run Policies and how they affect Balanced Growth in the UK In the United Kingdom, some policies have been present for a long period of time. Among these policies are free education and taxation. Free education was introduced in Great Britain in 1870 and was made compulsory for all school aged children. Epstein and Limage point out that “all children across the countries of the UK are entitled to free full-time education between the ages of five and sixteen” (2008, p. 448). Universal free education in the United Kingdom has continued “since 1902 by the provision of free secondary education in the Grammar and the County Schools” (Kumar, 1992, p. 10). Today, free education in the United Kingdom is not only provided at the elementary and secondary level. Higher education has also been made free. It is important to note that higher education has not become a public service only in recent years. The model was present prior to the 1990s and got to fail due to radical changes in the public services realm. Brown and Carasso state that “after the end of the Second World War, higher education in the United Kingdom was a public service to which all school leavers were entitled, free of charge or at very low cost, if their previous educational performance demonstrated that they were likely to benefit from it” (2013, p. xii). As this model continued to operate, students joined higher education institutions in large numbers and this led to a rethinking of how best to provide public services. This led to a collapse of the model. Today, the model has been reintroduced with a few changes since “postsecondary education has moved from being totally free to requiring a maximum annual fee of about $6,000 per year” (Gordon, 2009, p. 82). For poorer students, loans and scholarships have been made available. Higher education has also been expanded to include colleges, polytechnics and universities. The United Kingdom tax system is another model that has existed for decades. Ault and Arnold point out that “because the UK tax system has been around since the Middle Ages, the tax year starts, not at some arbitrary date in mid-Winter (such as 1 January), but in the Spring (6 April)” (2010, p. 145). They add that although there was a gap in income tax between 1816 and 1842, it has remained in force since its introduction in 1798 (Ault and Arnold, 2010).This makes income tax a temporary form of tax which parliament has to decide whether or not to have at any particular year. Corporation tax was introduced in 1965. When policies operate in a nation for a long time, they are bound to affect the balance of the economic growth rate. Since the United Kingdom still has policies that were passed years ago, they affect the balance of economic growth especially due to the fact that times change with other changes in monetary value and the populations increase with time. For this reason, governments get to be burdened by some policies such as the public education and this usually calls for reforms. In regard to tax, new ways of doing businesses emerge and this also calls for reforms to maintain balance in economic growth. A permanent tendency toward growth characterises economic development in the modern times. According to Oosterbaan, Steveninck and Windt, “the theory of balanced economic growth emphasizes the importance of a minimum volume of the investment program, also known as the Big Push and the importance of balanced development of the various sectors of the economy” (2000, p. 237-238). The United Kingdom has experienced unbalanced economic growth since the last decade. This began during the 2008 world economic crisis since the United Kingdom found itself having to largely depend on borrowing which made it fall in terms of international competitiveness. 4. Recommendations Although the new coalition government has done a lot to promote economic growth, it is yet to deliver the results it hoped for. According to a report by Dolpin of the Institute for public Policy Research (IPPR), the Gross Domestic Product is still below the peak experienced in 2008 and unemployment is rising especially due to the fact that more youths are graduating each year and getting into the competitive job market (2011). For these reasons, there is need for the United Kingdom government to place priority on these two issues to attain more economic growth and reverse the rising unemployment. In short, sustainable economic growth is of utmost importance. There are many ways through which jobs can be created. One of these ways is by funding the Green Deal, which is an initiative aimed at ensuring energy efficiency for homeowners. To fully implement the project, there are bound to be enough savings made. The Green Deal savings can henceforth be used to create a youth job guarantee scheme. On top of this, it is important to consider other people in the United Kingdom population who are jobless, especially those laid out from previous jobs. The job guarantee scheme can be used to secure them jobs as well and ultimately ensure that the largest percentage of the United Kingdom population has employment. In the last decade, the United Kingdom experienced unbalanced economic growth. On top of this it was noted that the economy hugely relied on public spending and the levels of debt incurred became unsustainable. The public sector had gradually become a sector that too many parts of the United Kingdom relied and depended on. For sustainable and balanced economic growth, there is need for more investment in the private sector and enterprises. This will in turn reduce overreliance on the public sector and consequently, the national debt level will reduce. Education plays a big role in fostering economic growth. This is especially true for higher education. Institutions such as universities support productive growth through innovation. For this reason, education and training should be top priorities for fostering economic growth in the United Kingdom. Grant and Vidler support the notion that “a country with high-quality education and training is likely to have a flexible, high-skilled and highly productive labour force” (2000, p. 290). The Great Britain Treasury points out that “to make further progress, the UK needs to tackle gaps in basic and intermediate skills and ensure training is more responsive to changing economic needs” (2006, p. 73). 5. Conclusion In every nation, economic growth is important. This is the same for the United Kingdom, which despite suffering a huge backtrend during the 2008 world economic crisis, has been able to make great improvements in terms of economic growth. 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