Economic Stability in the UK - Essay Example

Running Head: Economics and Government Economic Stability Eluded the Policy-makers of Successive UK Governments - Has the present UK Government achieved this when its Predecessors did not [Name of Writer] [Name of Institution] Economics in any country can play a pivotal role for its growth. In the UK the Labor party has been highly criticized by the public and the opposition to have hurt the country's economy by being the ally in the war against terror after the 9/11 incident. The opposition claims that the promises of economic stability by the government are all lie. On the other hand, government claims that the economic conditions in the present government's period have improved considerably in relation to the old government. Now what is the truth is a question whose answer we will be looking for in this paper. Economic stability can be defined as "the absence of wide fluctuations in the economic growth rate, the level of employment and average prices" (glossary, n.d.). Economic stability ensures various improvements in the country, such as high living standard, better employment opportunity, stable inflation rate and high GDP and eventually ensure sustainable economic growth. To sustain the economic stability certain steps should be taken by the government. One reform introduced by this government was an improved and strong macroeconomic framework. Macroeconomic Framework As the old government was unsuccessful in ensuring a long live economic stability, the present government had to take some steps to ensure the stability in the country. It can be said that the past government lagged behind because of the failure to create a credible macroeconomic policy. The present government has taken some steps to strengthen the macroeconomic framework. For this the most important step taken was to put a transparent framework for defining the economic policy. The policymaker can work more easily in a transparent environment, as the causes for a bad situation will be known by all (HM Treasury, 2006). The other steps taken were to define clear policy objectives, ensure efficiency and accountability (Delivering Economic Stability, 2000). Accountability is important not only here but also in all the industries, as it will increase the productivity. "In the UK, the Treasury Select Committee has a central role in holding to account the Treasury for overall economic policy, as well as the Treasury and the Monetary Policy Committee in relation to their own particular responsibilities for macroeconomic policy" (HM Treasury, 2006). The objective of this framework is to improve the economic growth, increase the employment rate and stable the inflation. The two main instruments of this framework are the monetary policy and the fiscal policy. Although these policies were welcomed by the critics, but there is a question mark to the effectiveness of the policies. Monetary Policy "Monetary policy is the government or central bank process of managing money supply to achieve specific goals-such as constraining inflation, maintaining an exchange rate, achieving full employment or economic growth. Monetary policy can involve changing certain interest rates, either directly or indirectly through open market operations, setting reserve requirements, or trading in foreign exchange markets." (Wikipedia, n.d) In 1997, it was announced that the Monetary Policy Committee of the Bank of England would be responsible for decisions on interest rates, thus making the Bank of England independent (HM Treasury, 2006). The interest rates are set by this committee, in accordance to the inflation. "The Bank's Monetary Policy Committee is made up of nine members - the Governor, the two Deputy Governors, the Bank's Chief Economist, the Executive Director for Markets and four external members appointed directly by the Chancellor. The appointment of external members is designed to ensure that the Monetary Policy Committee benefits from thinking and expertise in addition to that gained inside the Bank of England." (Bank of England, n.d.) All these members serve for a specified tenure. The monetary policy is especially designed to ensure low and stable inflation. The key features of the policy are that the monetary policy committee should meet government inflation target of 2 percent annually, any deviations below the target should also be dealt as seriously as the vice versa (HM Treasury, n.d.). Fiscal Policy "Fiscal policy is the economic term that defines the set of principles and decisions of a government in setting the level of public expenditure and how that expenditure is funded. Fiscal Policy and Monetary Policy are the macroeconomic tools that governments have at their disposal to manage the economy. Fiscal Policy is the deliberate change in government spending, government borrowing or taxes to stimulate or slow down the economy. It contrasts with monetary policy, which describes the policies about the supply of money to the economy." (Wikipedia, n.d) After the reforms in the monetary policy, government has taken some steps to strengthen the fiscal policy as well. The fiscal policy works parallel to monetary policy to assist government to sustain high growth rate. The government has defined five principles of fiscal management that are transparency, stability, responsibility, fairness and efficiency (HM Treasury, n.d.). The fiscal policy uses two rules, which are the golden rule, and the sustainable investment rule, which are as follows: 1. The golden rule is defined as, "over the economic cycle, the government will borrow only to invest and not to fund current spending" (Financial Policy Sustainability, n.d.). 2. The sustainable investment rule states "public sector debt as a proportion of GDP will be held over the economic cycle at a stable and prudent level. Other things equal, net debt will be maintained below 40% of GDP over the economic cycle." (Financial Policy Sustainability, n.d.). Indicators to the Economic Stability There are certain indicators to the economy, which narrate the economic trend. In those, GDP can be declared as the measurement for economic growth. The other indicators are the inflation which should be set at a stable rate, employment rate should be high, the annual trade deficit must be as low as possible, and the taxation policy should be for the benefit of the common man of the country. In the following paragraphs, we will be discussing the current governments' performance in these pointers. GDP Growth The GDP although stable at 2.5 % in the last few quarters, have been as low as 1.9 % in 2005 (Price Waterhouse Coopers, 2006). The growth from the last year on one side is positive but the decrease in GDP to 1.9 %, which was at a 6 year-low, was the point that would have created havocs in the Labor party, and the ability of the current government was questioned. The only positive achieved by the present government in the last few quarters is the low volatility, which wasn't present in the past few years. The past decade has shown volatility, which is not a positive sign for the investors, as they don't feel secure. Inflation Inflation rate for the last couple of years have fluctuated in the UK. But it has been much better then in the 90s when the current opposition was ruling, when the inflation was at its high. As seen above the government's target of inflation is 2% CPI, more than 1 % increase or decrease in the rate can be questioned. This year the inflation went as high as 2.5% CPI, due to increase in energy prices, but then became stable at 2.4% CPI in the next few months. The downward trend the next month came because of the decrease in the transport cost. But according to reports the other reason besides the energy sector, for increase in inflation was the rise in tuition fees in the universities and the house prices (National Statistics, 2006). Employment Rate It is a fact that with the continuous growth in the market, employment opportunities have increased noticeably in the UK. But according to National Statistics in the UK, unemployment rate has climbed to 5.6% this quarter in comparison to last quarter's 5.5% which is the highest in seven years (Unemployment at seven-year high, 2006). The government says that it is because a huge number of skilled labor is moving towards the UK. This is a fact too, but the fact that now more people are sitting home than last year is disturbing too. Annual Trade Deficit The trade deficit is also an important indicator to the government's economic policy, as it determines the import and export trend of the country. It plays an important role in the economic growth. The trade deficit showed an increasing trend during the last few years. This year the goods trade deficit was 5.45 billion from last quarter's 7.04 billion in February; this was excluding exceptional items (BBC News, 2006). Although this has been much better this year the overall trade deficit for this decade hasn't been outstanding. Property Price House price is directly proportional to the economic growth, if the economy boosts the price of the houses will also increase. This year the economic growth has increased, but the increase in the property price has been much far beyond expectations. Although the government has taken some reforms to improve the situation, but the result hasn't been seen yet. The result from those measures is expected 10 years from now. House prices in September rose by 0.8%, pushing the annual rate of house price inflation up from 7.7% to 8% (BBC News, 2006). This has resulted in the increase in the interest rates to 5% by the Bank of England, and the same trend is expected in the future if the inflation remains high (BBC News, 2006). Taxation Although not directly related to the economic stability in the country, but the taxes play an important role in the GDP of the country. The Labor party amidst its claim to stabilize the economy and inflation has been greatly unsuccessful to cut taxes. This issue is costing the party a lot of votes. The general public in then UK demands tax cuts as promised. In this situation a survey shows around 10 million adults in the UK want to leave the country because of disappointment over the government's failure to cut taxes (Cracknell, 2006). Post 9/11 Situation and Economic Stability One hindrance for the present government is the situation after 9/11, and the role of the UK government in the war against terror. A lot of infrastructure is wasted on this war then this situation has grown the possibility of a terrorist attack, as happened last year. The attacks of 7/7 have shaken the economy a bit, as seen in the GDP growth last year. The government is now criticized by people from all walks of life to discontinue its role in this war. It has immense pressure to withdraw its troop from the war-ridden countries. Conclusion It can be said that the first few years of the government weren't too good. The above indicators show that although this year the government's performance has been much better, but if the overall performance is to be measured, it has its ups and downs. The inflation has decreased and is comparatively stable from the last few decades. The employment rate is satisfactory. The property price has risen a great deal and the bad thing about it is that the government hasn't taken any short-term measures, whose result can be seen in the near future. The GDP growth has grown and gone down but the overall trend was stable. The UK government has suffered during the last decades, as a result of the policy mistakes. In this regard it is important to follow the principles of the macroeconomic framework to ensure stability, but now the sources have started saying that some of the changes were needless. I can conclude from the current situation that the target the government had promised isn't reached yet. More conviction and hard work is needed to build the UK as a highly sustainable economic stable power. References Bank of England. (n.d.). Monetary policy committee. Retrieved November 28, 2006 from http://www.bankofengland.co.uk/monetarypolicy/overview.htm. BBC News. (November 13, 2006). House prices continue upward move. Retrieved November 28, 2006 from http://news.bbc.co.uk/1/hi/business/6142986.stm. BBC News. (November 9, 2006). UK interest rates increased to 5%. Retrieved November 28, 2006 from http://news.bbc.co.uk/1/hi/business/6129780.stm. BBC News. (May 10, 2006). UK trade deficit narrows sharply. Retrieved November 28, 2006 from http://news.bbc.co.uk/1/hi/business/4757249.stm. Cracknell, D. (August 27,2006). 10m want to quit 'over-taxed' UK. Times online. Retrieved November 28, 2006 from http://www.timesonline.co.uk/article/0,,2087-2330678,00.html. Delivering Economic Stability. (December, 2000). Convergence programme submitted in line with the stability and growth pact. Retrieved November 28, 2006 from http://www.hm-treasury.gov.uk/media//A5B37/DeliveringEconomic.pdf. Financial Policy Sustainability. (n.d.). Retrieved November 28, 2006 from http://www.sussex.ac.uk/economics/documents/fiscal_rules_lecture.doc. Glossary. (n.d). Retrieved November 28, 2006 from http://www.econ100.com/eu5e/open/glossary.html. HM Treasury. (n.d.). Fiscal policy. Retrieved November 28, 2006 from http://www.hm-treasury.gov.uk/documents/uk_economy/fiscal_policy/ukecon_fisc_index.cfm#Links_to_Outside_Organisations_Relevant_Publications. HM Treasury. (n.d.). Monetary policy. Retrieved November 28, 2006 from http://www.hm-treasury.gov.uk/documents/uk_economy/monetary_policy/ukecon_mon_index.cfm. HM Treasury. (2006). UK policy coordination: The importance of institutional design. Retrieved November 28, 2006 from http://www.hm-treasury.gov.uk/mediastore/otherfiles/ukpolicycoordination.pdf. National Statistics. (2006). Inflation. Retrieved November 28, 2006 from http://www.statistics.gov.uk/cci/nugget.aspid=19. Price Waterhouse Coopers. (November, 2006). UK economic outlook. Retrieved November 28, 2006 from http://www.pwc.com/uk/eng/ins-sol/publ/ukoutlook/pwc_economicoutlook_nov06.pdf. Wikipedia. The Free Encyclopedia. (n.d). Fiscal policy. Retrieved November 28, 2006 from http://en.wikipedia.org/wiki/Fiscal_policy. Wikipedia. The Free Encyclopedia. (n.d). Monetary policy. Retrieved November 28, 2006 from http://en.wikipedia.org/wiki/Monetary_policy. Read More