The UK Growth Conundrum - Case Study Example

The UK Economy The double dip recession poses serious risk on the economy of U.K. the turbulence in Europe is creating a crisis on the economy but researchers are of the opinion that the sluggish growth of the economy is the after effect of the economic decisions taken closer at home. The domestic demand has not taken the steep rising curve whereas fall in real interest rates, coupled by fall in income of households, strict credit conditions as well as ongoing fiscal consolidation can be thought of as other reasons. The rate of unemployment is on the rise and the policies adopted by the government to cut back spending is acting as salt to injuries. The economy is in need to stimulus but the government is still posing the unprecedented actions of cutting spending which is reducing the growth prospects and in turn affecting the standard of living of the households. The aim of the assignment is to analyze and find out the ways through which the economy can be set course for the path of revival. The paths are directed towards increasing the demand conditions and boosting the level of employment so as to enable more and more people join the workforce and become eligible to lead the minimum life standard. The workforce will strengthen the economy in the long run. The feasible ways to revive the economy 1. The quantitative easing technique The bank of England took the initiative of quantitative easing in order to boost the economy. The action was welcomed but the last round failed to provide significant efforts over the economy. The printed money either caught up in the bank account or played the part in prop up asset prices. With the view to make the action more effective the money can be channelled directly to the firms which make use of the money in expansion process. The money can be used in purchasing corporate bonds or through a new government owned investment vehicle. Such a process will ensure better us of the printed money than just increasing the share prices. 2. Reverse the VAT rise The rise in the rate of VAT can add to the ooze of inflation which in turn sucked the demand and resulted in contraction in demand conditions. If the rate of VAT would have been constant then the CPI figures would have been much lesser than actually achieved. The rise in the rate of VAT contributes in adding to the squeeze on real wages (Wall and Griffiths, 2008). The expenditures made by the households would have been affected which will cause pain on the high streets. VAT is a type of tax that hurts the low income earners more as they are willing to spend much of their incomes. On the other hand it hurts the high income earners less as they are willing to save a major proportion of their income. If the VAT is reversed it would cause to bring down the level of inflation while raising the real wages. It would put money in the pockets of the consumers and it would boost the economy in the long run. 3. Raise capital allowances The government is playing the role in corporation tax cuts by reducing the capital allowances. The capital allowances allow businesses that invests in order to claim or the value of some proportion of that investment and as a result reduce the bills made on taxes. The net result of these changes is to channelize the money from the businesses that invest heavily to the businesses that are short of investments or in other words from the manufacturing to the finance sector. Such a strategy would go against the target set by the government to rebalance the economy but would contribute to the lack or shortfall of investment that the economy is currently experiencing. The increase in the capital allowances would act as the catalyst in encouraging the businesses to focus on the long term growth strategy and in turn help to increase investment and the domestic demand will rise. 4. Investments on training of young generation There are more than one million unemployed in the economy who are looking to join the work force. One can thought of two independent responses that can be introduced by the government. The government can intervene in order to stop the young people from being unemployed for long time. The Future Jobs Fund was eliminated but steps should be taken to create real job opportunities which would pay at least the minimum wage to the young people. These would keep the level of demand stable and people will be able to maintain the minimum standard of living. The young people should be catered with many chances so that they can identify their domain and excel in that. The number of training opportunities can be increased and additional subsidy can also be provided if they commit to provide quality work. The young people should be taught to identify their skills so that they can make maximum utilization of their knowledge in the course of life (Reenen, 2011, p. 54). The training program can have an advanced level which will provide technical knowledge to the unemployed. The program can be made of two to three years and steps can be taken to bring maximum number of people under the program. The training related to education can also be strengthened for the young people. 5. Driving investments in energy intensive industries The impact of the energy costs can put serious effects on the energy intensive industries and in jeopardising the future operations of those industries. An effective policy package from the part of the government will have a key role to play in the low carbon economy. Such a policy package will deal with the growing risk of carbon leakage. The absence of policy poses threats on the number of job loss as well as carbon emissions will cause in changing of climatic conditions. The government can launch some competitive policies that would replicate the policies adopted in competing countries like Germany. The immediate proposal can include relief from the carbon tax and financial help for new technology. 6. Use procurement The government is beginning to show its inclination in gaining procurement to support the economy. It can be argued that value for money is a major concern for the tax payer. The procurement contracts should include clauses that aim to guarantee trainings, which will aim to train the person willing to join the workforce in such a fashion so that they will find it relatively easy to enter the job market. Such measures will increase the procurement costs of the government in the initial stages but the tax payers’ money can be utilized in greater efficiently and will ensure higher skills and more participation in the labour market. This will help the emerging industries to accept the green challenge (Economic and Social Research Council, n.d.). Policy makers should spend much time to find out ways so that the revenue generated within the economy can be channelized through effective measures so as to bring maximum gains for the economy as a whole. 7. Protect the science budget Discussions are still on the ventures regarding the decision of the government in protecting the science budget in cash terms. The newly defined science budget is somewhat frozen according to the Campaign for Science and Engineering. If the pre 2010 definition of science budget is adopted there would be an immediate decline of a major proportion of money in cash terms over the spending review. The sum is calculated before the rate of inflation is taken into account. The investments directed towards improvements in science and technology will have significant returns on the economy in the short and in the long run. The returns can also be quantified in terms of spin out companies, investments in research and development, training of the work force and will also have significant impact upon the quality of life which is not quantifiable. The investments in the field of science and technology are vital when UK will have to compete with India and China. 8. Support the solar power feed If the government takes the initiative to halve the feed in tariff for the people working in the solar power sector then these people are in risk. If the solar power can be generated at home then the firms engaged in providing solar power will lose orders and people will be driven on the unemployed force (Trades Union Congress, p. 7). The firms are expecting cancellation of future orders and are on the verge to cut down the man power which means unemployment rate will take the upward rising curve. The decision to cut tariff should be immediately withdrawn or keep on hold till it negotiates a new industry and promise real growth in jobs opportunity in this green sector. 9. Reverse the freeze in public sector wage In 2010 the Chancellor announced a two year freeze period for the public sector. The effect got compounded with increase in the level of inflation. The limited protection announced by the Chancellor was lacking while the low income earners did not witnessed any hike at all. The survey conducted by the Income Data services revealed that the contraction in demand conditions was a cause of the wage freeze. The spending made from the part of the consumer contracted along with high inflation meant huge squeeze on the spending power of the workers involved in the public sector. If the freeze imposed upon the wages of those workers are withdrawn the demand curve will find its path back to the course and the overall circulation of money within the economy will increase (Nesta, 2012). The expenditures made on the purchases of goods as well as services will rise which will open up the shut doors of employment opportunities. 10. Introduction of one-off increase in child benefits The one-off child benefit is expected to boost the economy which guarantees that money will directly get back to the economy. The child benefit is paid on weekly basis to the households across the country. Conclusion The above discussed points give a rough idea on how to improve the conditions of the economy so as to deal with the budget deficit and the stagnant private sector. The discussed point gibes only an idea on the overall economy and analyzed some of the breakthroughs the policy makers can adopt so that the economy is able to find the stable path. Works cited Wall, S. and Griffiths, A. Economics for business and management. 2008. Prentice Hall. USA. Trades Union Congress. 10 Ways to Kick-start the Economy. n.d. Web. 6th March, 2013. Retrieved From: http://www.tuc.org.uk/tucfiles/166/TenWaystoKickStarttheEconomy.pdf. Economic and Social Research Council. Re-igniting growth. n.d. Web. 6th March, 2013. Retrieved from: http://www.esrc.ac.uk/_images/Re-Igniting%20Growth_tcm8-24758.pdf. Reenen ,J. From ‘Plan B’ to ‘Plan V’: what the UK economy needs to reboot and rebalance growth. 2011. Web. 6th March, 2013. Retrieved from: http://eprints.lse.ac.uk/33093/1/blogs.lse.ac.uk-From_%E2%80%98Plan_B%E2%80%99_to_%E2%80%98Plan_V%E2%80%99__what_the_UK_economy_needs_to_reboot_and_rebalance_growth.pdf. Nesta. How evidence can help the UK’s economic growth. 2012. Web. 6th March, 2013. Retrieved from: http://www.nesta.org.uk/assets/blog_entries/how_evidence_can_help_the_uks_economic_growth. Read More