An analysis of uk economic perfomance in third quarter 2012 - Essay Example

? AN ANALYSIS OF UK ECONOMIC PERFOMANCE IN THIRD QUARTER Group The economic chaos that set in the year 2008 hasbeen unprecedented. This has been described as the worst economic crisis since the Great Depression. Many companies have gone belly up and several countries are merely riding the storm. Most of the countries affected by this economic crisis are in the West. The European Union club of the rich nations has been especially hard hit (Mooney & Scott 2012). However, the country that shall be the focus of our attention in this paper is the United Kingdom. This country has experienced some of the heaviest blows from the economic slide. The recent riots in the streets of the capital, London and other major cities are an example of that. Several economic strategies have been employed to arrest the slide with little success. In the midst of all these despair, the government led by Prime Minister David Cameron has even sought to convince the people that economic growth is not the only indicator of prosperity. He has sought to use the ‘happiness index’ as a marker that the economic situation is improving. However, preaching this new gospel to a generation that has been obsessed with growth has been akin to preaching to the converted. This paper shall seek to analyze the economic woes facing the U.K, look at the remedies the government has put in place, suggest more effective policies and even explore the likely positive or negative reactions of the economy to these measures. The fourth quarter of the year 2012 ran from October to December; and during this period the UK economy contracted by 0.3 %. This is according to a report by the National Institute of Economic and Social Research (Anon 2013b). The same report went on to blame such slide on the unrealistic expectations raised by the economy in the third quarter. This is when the Olympics took place, and there was an economic revival caused by large numbers of incoming foreigners. This in essence means that the UK did not witness any period of growth over the last four quarters. However, amidst all this economic gloom, the service sector, the biggest in the country, actually grew although at a marginal rate of 0.1% in the month of October (Elliott 2012). This slide in the last quarter also intensified fears that the economy was on track for its third recession in almost as many years. There was also increased fear that the UK was headed for a triple-dip recession. Amidst all these angst the government was, as expected, defensive at the suggestion that its policies were not working. The Chancellor cited the crisis in the Eurozone as a contributory factor and even suggested that huge public debt built under the previous administration was to blame (Anon 2013a). As all this happened, the credit rating agencies were watching waiting to pounce. Any downgrade in the status of the UK’s credit rating would be the final blow. The government has over the last few years tried different measures which have had varied amounts of impact in the course of the recession. Among the most prominent have been the Treasury’s Deficit Reduction Program, raising taxes, cutting spending on welfare and ‘raising the axe to capital spending programs (Kirby 2012). All these shall be discussed below. Their initial objectives shall be analyzed, their current successes or failures shall be looked at, and finally I shall suggest alternative means to push for these policies or suggest new alternative policies altogether. Deficit reduction is indeed the most prominent among all the policies that have been instituted by the government. The government put this program in place soon after taking over. and in 2010 it held some promise, even drawing praise from the IMF. Under this program, the government sought to reduce the public debt that had ballooned under the previous Labor administration. By August 2012, the deficit stood at 14 billion pounds (Anon 2013a). The deficit is already rising and so the Chancellor shall have to abandon the program altogether. This is because it has led to greater austerity. This is implies removing extra demand from the economy, something that would topple an already shaky economy. The rationale is that once the country’s public indebtedness is reduced, it could result in cheaper borrowing rates and thus rejuvenate the bond markets. There was also a tax rise. The idea was that there needed to be more taxes to plug the huge financing gaps likely to result from reduced borrowing. This on the face of it seems very sound. However, in economics, as we have all come to appreciate, the devil is always in the detail. On one level, tax rises could help, but they shall impact negatively on the other side of the scale. This is the side that has to do with consumers. Consumers are likely to buy less with higher taxes; thus, the economy will still be on its knees (OECD 2013). Many shall recall George Bush’s call to the Americans to get back to their usual purchasing soon after September 11. Consumers have a huge role to play. The other measure taken by the UK is the cutting of welfare benefits. This is indeed sound program aimed at reducing spending. Spending did decrease as projected, but it came at a cost. Many people were pushed into greater dependency. They could not rely on the government anymore to support them until they were employed. This undoubtedly led to a reduction in spending which is a huge part of any economy. The final policy position was the reduction in capital spending. However, such cuts broke down the economy. The government is now realizing its folly and is trying to change tact. They have realized the centrality of infrastructure spending with regards to economic growth. This is after the construction sector, a huge employer, registered a huge contraction of 3.4% in the final quarter of 2012 (Anon 2013a). The Chancellor of exchequer has sought to correct this policy mistake by increasing spending in infrastructure by including one billion more pounds for road upgrades and one billion pounds for expansion of schools. The UK’s policy since the ascent into office of the Conservative led coalition has been two pronged. On one hand, there has been effort to cut the deficit, the rationale of which has been explored above. On the other hand, they have sought to foster growth. In an economic crisis unlike any since the Great Depression, the approach would seem like an oxymoron. This, sadly, is what it is. After the islanders have been subjected to such austerity, it is sad to note that its initial objectives have not been met. This has triggered the policy changes we have witnessed, although the government is hard-pressed to admit it publicly given that the general election is already beckoning (Elliott 2012). The defect in those policies has indeed been proven through the poor performance of the economy. The first policy that should be reviewed is deficit reduction. There has been an analysis that has proven that this policy has no practical basis apart from hoodwinking the public who only have a passing acquaintance with such grandiose economic initiatives. There has not been any deficit reduction close to the ambitious levels that Osbourne had in mind at the original drafting. In fact, the deficit increased from the previous year coming to 2012 (OECD 2013). The only way that these objectives can be met is to revise the deficit reduction targets. This way, economic sanity shall be restored. The only challenge is that allowing the deficit to rise could be compounded by a slower growth down the road. The other fiscal policy I would institute is an easing of the tax rises. The demand by ordinary consumers is what breathes life into the economy at a time of the falling exports. There are few countries that are enjoying an export boom, perhaps only Germany and China. This means that the economy has to rely more on its own citizens, rather than other people abroad (Mooney & Scott 2012). This would inevitably lead to an increase in taxes and create more balance in the public purse in as far as spending and revenue is concerned. Another policy remedy would be to review the cuts in capital spending programs. The value of such move has become vindicated by recent efforts by the Chancellor to increase spending in infrastructure (Anon 2013b). There is recognition, for instance, that manufacturing, transport and construction are huge employers. Increased spending would mean increased recruitment leading to a reduction in unemployment. The other area that deserves attention is the spending on welfare. It is okay for the government to seek ways of raising more revenue by cutting its spending on welfare; however, the timing seems wrong. This is a time when many people are out of employment as layoffs in the private sector increase so as to be more attuned to the current economic reality. This is the moment the government should be there for its people (Kirby 2012). Otherwise, they will not contribute to the growth of the economy due to their limited spending abilities. The problem with this policy is that it shall inevitably lead to an increase in the deficit. However, it is not as bad as it sounds. If the deficit is increasing while deficit reduction measures are in place, it will not be wrong to try this policy. In conclusion, the economic crisis in the UK is partly of the government’s own making. There are sound policies that could have been put in place to improve an already bad situation. The problem is that the Conservative-led government seems to have over diagnosed the UK’s economic malady, and in the process prescribed measures that are too stringent to even allow the government’s own objectives to be met (Anon 2013a). The good news is that there has been a realization that those policies were ill-founded and there has been correction in some areas. Among the areas targeted is the reduction in taxation, an increase in spending on infrastructure, reviewing initial cuts on welfare, and lastly revising the Deficit Reduction Program (Kirby 2012). The challenges that remain are purely ideological. There is a need to align themselves with the successful Thatcherite policies for the government currently in place. In the process, the reality and specifics of the economy today are ignored. However, it is beginning to appear that policy makers’ thinking is being informed less by ideology and more by logic. Bibliography Anon, 2013a. UK economy “contracted in fourth quarter”. BBC News Business. Available at: http://www.bbc.co.uk/news/business-20987571. Anon, 2013b. UK GDP shrank 0.3pc in fourth quarter, says Niesr. The Telegraph. Available at: http://www.telegraph.co.uk/finance/economics/9796123/UK-GDP-shrank-0.3pc-in-fourth-quarter-says-Niesr.html. Elliott, L., 2012. George Osborne’s deficit reduction plan: A blunt axe, blindly wielded. The Guardian. Available at: http://www.guardian.co.uk/business/2012/sep/23/osborne-deficit-plan-rethink [Accessed March 13, 2013]. Kirby, S., 2012. Prospects for the UK Economy. National Institute Economic Review, 219(1). Mooney, G. & Scott, G., 2012. Social Justice and Social Policy in Scotland, Bristol, UK: The Policy Press. OECD, 2013. OECD Economic Surveys: United Kingdom 2013, Paris: OECD Publishing. Read More