Evaluation of Macroeconomic Performance and Policy Responses - Essay Example

Evaluation of Macroeconomic Performance and Policy Responses U.K’s Microeconomic problem The major macroeconomic issues affecting the U.K include; rising rate of unemployment, slow economic growth, a large public debt by the U.K Government and increasing rate of inflation (Great Britain, 2014). Unemployment Unemployment is amongst the major economic problems faced by U.K since 2007 to present. The unemployment rate shot up from 5.2% in December 2007 to 7.9 percent in 2010. By 2011, it had risen to 8.5% and 8.8% in 2012 before it started going down rapidly in 2013 and by this year it was calculated at 6.2% of the economically active population. The U.K Government through the Flexible New Deal policy aims at reducing unemployment through evaluating on job expertise at the earliest period of the unemployment crisis. After evaluation, the Government gives private contractors the task of absorbing the skilled labour force into the private industry. Research from Australia and the larger United Kingdom has exhibited increased effectiveness in employment from competitive human resource privatization (Hein and Stockhammer, 2011). The other policy set down by the United Kingdom to tackle the unemployment issue is setting of budgetary measures that help the match between employers and unemployed. Improvement in the compensation system is at making jobs more appealing to employees who earn small amounts. The improvement of the labour market policies would also be a good step towards fighting the unemployment crisis in the U.K. The government should also promote local investment by ensuring that cheap credit facilities are available as well as ensuring policies that foresees business operation do not discourage investment (Nicholson, 1997) Rising Inflation Inflation is the increase in basic consumer commodities and drop in the value of a nation’s currency. In the U.K towards 2007 inflation was at 4.3% before falling sharply to -0.5 by the year 2009. In the following year 2010, inflation rose steadily to 4.6% and a further 5.2% in 2011. This was considered a historical figure within the previous ten years. From 2012 onwards it has been dropping steadily and was currently at 1.6% of the gross domestic product. King Mervyn, director of England Bank, has over the years applied monetary policy in his fight against inflation and turned out successful. The monetary policy aims at controlling the general economic spending levels. With the aim of preventing currency overflow by use of interest rates, monetary policy has been able to put inflation under control. The Bank of England (B.O.E) determines rates through which finance institutions are. This is down to the general public. Reducing the interest rates promotes borrowing in case of lack of capital in the economy. On the contrary, escalating rates of interest, helps saving thus reduces excessive cash in circulation (Bankofengland.co.uk, 2014). Slower Economic Growth In 2007 U.K’s economic growth was at 392 billion pounds and sharply slumped to 362 billion in 2008 before starting to climb again at a slow rate and reach 393 billion by 2014. Since the year 2008, economic growth in the U.K has been at a very low rate in comparison to other years facilitating loss in Gross domestic product. Slumped economic growth has led to a significant drop in wages and, as a result, low standards of living. On the other hand, slumped growth has resulted in higher levels of public debt burden. This makes it impossible to reduce the public debt. The U.K’s Government is using the fiscal policy as well as monetary policy to increase the country’s Gross domestic product. Fiscal policy is the use taxation and public expenditure to manage the economy (Hackman, 2008). During the budget, reading is when tax levels along with government spending are for the incoming fiscal year. Fiscal policy is in a variety of ways including Reflationary policy, deflationary policy and supply-side policy. Reflationary is used to raise the economic levels while deflationary is when the economic levels are too high to avoid chances of inflation. Supply side policy is used to increase the country’s GNP. The United Kingdom through its Bank of England Governor Mervyn argued that an improvement in the supply side productivity caused economic growth without creating inflation. The supply side policy has two further branches which included market-based policies and interventionist policies. Market focused policies were mainly on favourable laws that facilitated the production of goods and services bought by consumers and interventionist policies that were focused on practical labour laws (Hackman, 2008). Large Public Debt A public debt can be like the amount of money borrowed by the Government to facilitate its public expenditure as a result of budgetary deficits. From 2007, the public debt as a percentage of the GDP has been rising steadily from 43.7% in 2007 to 90.6% in 2014. (Mauro, 2011). The U.K proposed a more active fiscal policy with an aim to reduce the public debt through; 1. A higher level of investment in infrastructural growth and development. 2. Favourable policies to stimulate house construction through the assistance of purchasing and contribution to policy building. 3. Increase in property taxation of the wealthy as a means of reducing the poverty gap. 4. Use of low-interest rate borrowing to fund the majority of Government loans (Barell and Weale, 2010). Analysis of the implemented policies The flexible new deal employed by the U.K Government alongside budgetary measures to match the employees’ skills with employers wants was not effective in fighting unemployment. Inflationary rates continued to escalate from 2007 until 2013 when it started going down. The long term economic results which were finally achieved and financial experts noted that unemployment was set to drop further indicates its response to classical economic theory. According to the neoclassical theory of economy, the economy when left to itself without Government intervention would eventually bring itself to equilibrium as was the case from 2013 to 2014. Furthermore, the Government spending through budgetary allocations takes the needed resources required for economic development (Hackman, 2008). Application of monetary policies in inflation control has been effective in the control of inflation in the U.K. It can be that from 2007 to 2009 inflation dropped significantly before rising slightly and finally falling to 1.6%. According to classical economic theory, focus is always on developing long-term solutions to existing economic problems without the involvement of public expenditure (McDermott and Wescott, (1996). The use of inflationary fiscal policy by the Government was not the best policy in the stimulation of economic growth since the growth immediately slumped in 2008 and has been struggling since. The use of public expenditure and lack of a long-term solution to the problem slow economic growth make it unsuitable as per the neo-classical theory. Neo-classical theory advocates little or no Government interference as well as little or no Government expenditure involved (Barrell and Weale, 2010). With reference to Keynesian theory of economy the set down policies is correct since the economy is of consumption, investment and government expenditure. Keynesian theory further states that Government spending improves or steers economic growth when financing isn’t available (Nicholas, 1997). Keynesian theory moreover focuses on instant results in economic decisions. The policy by U.K to curb unemployment through budgetary allocation and Flexible new deal policy involved Government expenditure and investing in the private contractors hence it was okay. On the other hand, lack of short term results made it unsuitable for application based on Keynesian theory (Keynesian economics, 1998). The use of monetary policy, as well as fiscal policy in managing the economy was found to be effective tools. The two tools help to promote economic growth, and managing massive public debt. The reason is that they also utilized public expenditures to promote investment and economic levels in the United Kingdom (Ricketts, 1988). Reference List (1998). New Keynesian economics 2. Cambridge, Mass. [u.a.], MIT Press. Bankofengland.co.uk, (2014). Bank of England | Monetary Policy | How Monetary Policy Works. [Online] Available at: http://www.bankofengland.co.uk/monetarypolicy/Pages/how.aspx [Accessed 8 Dec. 2014]. Barrell, R and M Weale (2010), "Fiscal policy, fairness between generations, and national saving”, Oxford Review of Economic Policy, vol. 26(1), pages 87-116, spring. Great Britain. (2014). Scotland analysis: assessment of a sterling currency union. London, Stationery Office. Hackman, S. T. (2008). Production economics: integrating the microeconomic and engineering perspectives. Berlin, Springer. Hein, E., and Stockhammer, E. (2011). A Modern Guide to Keynesian Macroeconomics and Economic Policies. Cheltenham, Edward Elgar Pub. http://public.eblib.com/choice/publicfullrecord.aspx?p=685063. Mauro, P. (2011). Chipping away at public debt: sources of failure and keys to success in fiscal adjustment. Hoboken, N.J., Wiley. McDermott, C. J., and Wescott, R. F. (1996). An empirical analysis of fiscal adjustments. [Washington, D.C.], International Monetary Fund, Research Dept. Nicholson, W. (1997). Workbook to accompany Microeconomic theory: basic principles and extensions. Harcourt College Publishers. Ricketts, M. J. (1988). Neoclassical microeconomics. Aldershot, Hants, England, E. Elgar. Read More