Macroeconomic Objectives and Effect on Construction - Essay Example

The Macroeconomic Management Objectives of the Present Day UK Government Name Course Name and Code Instructor’s Name Date Table of Contents Table of Contents 2 The construction industry 3 The difference between macro & micro economics 3 The approaches of Keynes (New Keynesian Economics) & monetarists 4 The macroeconomic objectives and effect on/effect of construction 6 The policy instruments 8 Fiscal policy 8 Monetary policy 9 Regulatory policies 10 Conclusion 11 References 12 The construction industry The construction industry comprises of both private and public housing, public buildings, commercial and industrial buildings and infrastructure. The industry is also responsible for repairing, maintaining and refurbishment of existing buildings in addition to providing installation services such as ventilation and power in new and old buildings. As at the beginning of 2011, about 2,128,000 people were working in the construction industry in UK (Prospects, 2011). It is estimated that the construction industry contributed gross value of £64,747 million to the UK economy in 2004 (National Statistics, 2006). It is also estimated that in the fourth quarter of 2009 the industry employed over 2.2 million people. Great Britain had about 194,000 construction firms in 2009 (Office for National Statistics, 2010). The total orders received by construction industry in 2009 are estimated to have been around £18.7 billion from the private sector and £15.1 billion from the public sector (Office for National Statistics, 2010). It is predicted that in spite of the prolonged downturn, the construction industry output growth in UK between 2013 and 2015 will reach 6.2% above the 2011 levels and that the annual recruitment forecast for 2015 is estimated to be around 43,000 workers at all levels (Office for National Statistics, 2010). The difference between macro & micro economics Microeconomics involves the study of decisions made by people and businesses in regard to resource allocation and prices of goods and services. On the other hand, macroeconomics involves the study of the behaviour of the economy as a whole, that is, entire economies and industries (Millmow, 2010). It looks at economy wide phenomena such as Gross National Product (GDP) and how it is impacted upon by variations in unemployment, rate of growth, national income and price levels (Brooker and Wilkinson, 2010). Whereas macroeconomics takes a top down approach to analyze the economy; microeconomics takes a bottoms-up approach. Whereas microeconomics involves studying the problems of individual economic units such as a firm, an industry or a consumer; macroeconomics involves studying economic problems related to an economy in relation to national income or total savings (Rochon and Rossi, 2007). Furthermore, microeconomics is concerned with the study price determination and resource allocation problems whereas macroeconomics is concerned with the study of the problems of economic growth, income determination and employment (Millmow, 2010). Moreover, microeconomics assumes that other things remain constant while formulating economic theories whereas in macroeconomics variables are mutually interrelated independently (Brooker and Wilkinson, 2010). The approaches of Keynes (New Keynesian Economics) & monetarists Keynesian economics argues that inefficient macroeconomic outcomes results from decisions made by private sector and thus advocates for active policy responses by the public sector to stabilize output over the business cycle (Rochon and Rossi, 2007). A mixed economy predominated by private sector but with the government and public sector playing a significant role is advocated by Keynesian economics. Keynes argued that increased investment by the government results in more spending in the general economy that consequently results in increased production and investment that further stimulates more income and spending in a form a cascade of events (Millmow, 2010). According Keynesian, excessive saving could encourage recession and even depression since it results in fall in investment (Rochon and Rossi, 2007). He also argued that interest rates are not mainly determined by savings and investments in the short run but instead this is determined by supply of and demand for the stock of money. Moreover, Keynes’ theory argued that active government policy could be effective in the management of economy (Brooker and Wilkinson, 2010). He advocated for countercyclical fiscal policies which acted against the business cycle tide. New Keynesian economics is an updated version of Keynesian economics. It theorizes that people are not perfectly rational but nearly rational (Millmow, 2010). It further posts that people do not carefully weigh the inflation rate, the unemployment rate and monetary policy before they decide to cut their monthly prices (Rochon and Rossi, 2007). Rather, people have a fuzzy idea about where their prices ought to be and make their best guesses (Brooker and Wilkinson, 2010). However, since people are individualistic in nature, they often make mistakes in their own favour and hence underestimate how much they really ought to cut. Monetarism refers to economic thought which advocates for the government to be in control of the amount of money in circulation. The theory argues that variation in the money supply greatly influence the national output in the short run and the price level for a prolonged period of time and that objectives of monetary policy can best be met via targeting the growth rate of the money supply (Rochon and Rossi, 2007). The theory is derived from two opposing ideas: the hard money policies of 19th century and the Keynesian theory (Millmow, 2010). In the UK Margret Thatcher implemented monetarism to fight inflation and she successfully reduced it from 10.3% in 1979 to 4.6% by 1983. Some economists have linked monetarism and macroeconomics and as such are treating monetarism as a special case of Keynesian theory. The macroeconomic objectives and effect on/effect of construction One of the macroeconomic objectives of UK government is to ensure a sustained rate of long term economic growth. Economy growth is measured using the annual rate of change of real gross national product (GNP) per capita. However, sometimes GDP is used for purposes of international comparison (Rochon and Rossi, 2007). Higher levels of growth are associated with increased levels of fixed investment in buildings, dwellings and infrastructure (Millmow, 2010). The construction industry is one of the major beneficiaries of strong economic growth in a country (Brooker and Wilkinson, 2010). On the other hand, a decline in annual real GNP can result in a recession in the construction industry as what happened in the first half of 1990s in the UK. Another objective of the UK government is to ensure low levels of unemployment (Rochon and Rossi, 2007). Like other EU countries, UK becomes concerned when its unemployment rates rises above 6%. Thus when governments initiate large scale capital expenditure programs aimed at creating employment opportunities, such programs are characterized with increased construction content (Millmow, 2010). Another objective of the UK government is to ensure price and wage stability. The government also has a primary objective to control price inflation (Brooker and Wilkinson, 2010). This is because increased price inflation is often harmful to all sectors of the economy including construction sector (Millmow, 2010). This can also adversely impact on the country’s balance of trade since it results in increased rise in export price and a fall in import prices (Rochon and Rossi, 2007). It also results in distorted distribution of income across the population. Inflation also creates marked price discrepancies in different goods and service markets as exemplified by recent increase in housing prices in UK (Millmow, 2010). Stability in prices are beneficial to the construction industry since it helps to contain tender prices and ensures that client’s cost budget are met. UK government also has a macroeconomic objective of ensuring trade balance with other nations that results in the stability in exchange rate (Rochon and Rossi, 2007). Persistent and significant deficit balances on the current account are essential factors that influence the strength of foreign exchange of a country (Millmow, 2010). Construction firms which work overseas and are involved in significant import of materials and components benefit from stable exchange rates and they may be affected adversely by short term fluctuations in these rates (Brooker and Wilkinson, 2010). UK government also has a macroeconomic objective of protecting the environment (Plunkett, 2007). The government aims at reducing carbon emission that has been implicated in global warming (Millmow, 2010). It also aims at reducing pollution through reduction of waste, preservation of biodiversity and establishing sustainable development practices (Rochon and Rossi, 2007). Environmental policies have strong impact on construction industry since dwellings and buildings are prime emitters of carbon and construction industries are often implicated in pollution and poor waste management practices (Brooker and Wilkinson, 2010). The policy instruments Policy instruments that are used to attain the above objectives and which impact on construction industry in UK include fiscal, monetary and regulatory policies. Fiscal policy The fiscal policy in UK is under the control of HM Treasury and the management of budget is in accordance to two key principles. First, the public sector debt which is expressed as a proportion of GNP is required to be held stable over the economic cycle (Plunkett, 2007). Second, the government can only borrow not more than 3% of GNP to carry out investment and not to spend it on current spending. The construction industry is significantly impacted on by fiscal changes in relation to a range of tax adjustments and to government spending allocation on capital projects. The fiscal policy aims at stabilizing the economy to enable macroeconomic objectives to be attained. It aims at impacting on economic growth and minimizing unemployment (Plunkett, 2007). It also aims at ensuring fair distribution of national GNP across the population by making tax adjustments to collect from wealthier individuals and making transfer payments to those on lower incomes (Bygrave and Zacharakis, 2010). This allows poor individuals to spend on consumer goods and housing services. In the UK, the government has been levying VAT on all materials and services used in construction repair and maintenance in addition to construction of private sector industrial and commercial new work (Brooker and Wilkinson, 2010). This makes small firms who are not registered for VAT to carry out construction contracts at a reduced price in comparison to larger firms who must make VAT returns. In UK, the differences between current and capital expenditure are blurred due to the preference of the government to fund most large refurbishment and new capital programs via the PFI and paying for the buildings that result and structures via annual rentals for a specified period of time (Plunkett, 2007). Direct payments are used in small scale repair and maintenance work on public sector (Bygrave and Zacharakis, 2010). Government departments usually put forward construction programs which cannot be funded simultaneous without impacting on the fiscal budget and then rolling programs of construction work are drawn up in anticipation for future funding when expenditure budget allows. Monetary policy This policy is controlled by the bank of England in UK. The policy determines the availability and price of credit in the economy. The policy sets the baseline terms and conditions for borrowing money. This policy influences planned demand expenditures. Since construction is dependent on loans from banking sector, the set conditions of the policy impacts directly on the construction industry. In addition, monetary policy regulates external exchange rates (Plunkett, 2007). Since construction industry uses extensive import materials and often exports its services to carry out overseas construction projects, the exchange rate and its stability determines such activities (Bygrave and Zacharakis, 2010). The policy helps in controlling inflation in a country. In case inflation pressures increase, monetary policy raises interest rates and tightens money supply and the measures are reversed when spending needs to be boosted without creating price and wage acceleration (Hughes and Ferrett, 2008). For instance, during the first half of 2007 the Bank of England raised its base rate upwards in attempt to control the increased inflation in the UK economy. However, the effect of this was only felt after several months after initiating the adjustment in interest rates. This resulted in reduced construction activities in UK due increased interest rates which were being charged to high risk customers including most small construction firms (Plunkett, 2007). However, large construction companies increased their activities in overseas countries which had lower interest rates. The UK government also uses monetary policy to monitor the value of the sterling pound against other world currencies. For instance, in 2007, UK contractors and consultants working in US experienced a reduction in their revenue due to slow strengthening of the sterling pound against the US dollar. Regulatory policies The construction industry is subject to a wide range of regulatory policies since it impacts on both the economy and the environment. In this section policies aimed at protecting the environment are considered. The building regulations are the most direct type of environmental control. The building process regulation in UK has strict standards. Recently the UK government started implementing the zero carbon policies on construction industry. The policy was published in 2007. The aim of the policy was to ensure that all new build homes would be zero carbon from 2016. The policy also expects that from 2019 all non-domestic new builds will also be required to have zero net carbon emissions. The UK Green Building Council has also proposed for a Code for Sustainable Buildings. This will help to improve the focus on energy efficiency in existing buildings. The construction contractors are expected to comply with Part L of the Building Regulations (Plunkett, 2007). The constructors are also expected to comply with other regulatory instruments, such as a mandatory requirement to design to Level 6 of the Code for Sustainable Homes (Bygrave and Zacharakis, 2010). All these regulations imply that construction will have to incur increased expenses to meet such regulations and as such other policies such as fiscal and monetary policies will determine the pace at which construction industry will grow in UK (Barrett and Sexton, 2008). Conclusion The construction industry comprises of both private and public housing, public buildings, commercial and industrial buildings and infrastructure. Microeconomics involves the study of decisions made by people and businesses in regard to resource allocation and prices of goods and services. On the other hand, macroeconomics involves the study of the behaviour of the economy as a whole, that is, entire economies and industries. Keynesian economics argues that inefficient macroeconomic outcomes results from decisions made by private sector and thus advocates for active policy responses by the public sector to stabilize output over the business cycle. New Keynesian economics is an updated version of Keynesian economics which theorizes that people are not perfectly rational but nearly rational. Monetarism refers to economic thought which advocates for the government to be in control of the amount of money in circulation. Macroeconomic objectives of UK government include ensuring a sustained rate of long term economic growth, ensuring low levels of unemployment, ensuring price and wage stability, ensuring trade balance with other nations that results in the stability in exchange rate and protecting the environment. The UK government uses fiscal, monetary and regulatory policies to address these objectives in construction industry. References Barrett, P., and Sexton, M. 2008. Innovation in Small Construction Firms. London: Routledge Publishers. Brooker, P., and Wilkinson, S. 2010. Mediation in the Construction Industry: An International Review. London: Taylor & Francis. Bygrave, W., and Zacharakis, A. 2010. Entrepreneurship, 2nd Ed. New York: John Wiley and Sons. Hughes, P., and Ferrett, E. 2008. Introduction to Health and Safety in Construction: The Handbook for Construction Professionals and Students on NEBOSH and Other Construction Courses, 3rd Ed. London: Routledge Publishers. Millmow, A. 2010. The Power of Economic Ideas: The Origins of Keynesian Macroeconomic Management in Interwar Australia 1929-1939. London: ANU E Press. National Statistics. 2006. Amendment: United Kingdom National Accounts: The Blue Book 2006. London: National Statistics. Office for National Statistics. 2010. Construction Statistics Annual 2010. Available at: http://www.statistics.gov.uk/downloads/theme_commerce/CSA-2010/Opening%20page.pdf [Accessed 4 Dec. 2011] Plunkett, J. 2007. Plunkett's Real Estate and Construction Industry Almanac 2007 (eBook): Real Estate and Construction Industry Market Research, Statistics, Trends and Leading Companies. London: Plunkett Research, Ltd. Prospects. 2011. Construction. Available at: http://www.prospects.ac.uk/industries_construction_overview.htm [Accessed 4 Dec. 2011] Rochon, L., and Rossi, S. 2007. Monetary and Exchange Rate Systems: A Global View of Financial Crises. London: Edward Elgar Publishing. Read More