Recession in the United Kingdom - Essay Example

Recession in United Kingdom Introduction Recession is a phase of general degradation in the economy. The recession can be defined as the decrease of the GDP in two successive quarters. The recession brings with it general imbalances in the economy and the components of the economy suffers. The consequences of the recession are the degradation of the capital and the real estate market. The unemployment in the economy increases. The general condition in the economy suffers. The companies in the economy feel the effect of the credit crunch in the system. The recession is shorter than the depression but if the recession continues for a longer period it is termed as the depression. The causes of the recession in general cannot be determined but the onus falls on the administration and the financial system of the economy. (Recession, n.d.) The recession in the latter half of 2000 was severe and the effects were visible in various economies of the world. The focal point of the recession of the 2008-09 was on the USA and it soon spread to the different corners of the globe. The main reason for the recession can be attributed to the housing sector of the USA and the inability of the financial system of the USA to tackle the problem. The components of the financial system like the banks and the financial companies were many ways responsible for the origin of the recession. USA, being one of the financial epicenters of the world, had a control over the global financial system. Therefore, the effects of the recession were visible in many parts of the world and the companies were cutting their manpower to cut the costs. The global economy suffered and the Governments of the various countries had to take severe measures to counter the effects of the recession. UK being another nerve center of the global financial world faced the severe effects of recession. Another cause for the recession in the UK was that the economy of the country was dependent on the economy of the US and after the globalization of the economy companies of the other countries started to function in the UK. The Government had to put some efforts and it had to renew the policies to control the effects of the recession. The paper will explore the issue recession in the UK with special emphasis on the impact of measures undertaken by the government to tackle the recession. Recession in the UK- Causes and effects Causes As discussed in the earlier part the origin of the global recession was the USA and the reasons for the recession can be attributed to the failures of the banks and the financial companies. The sector, which contributed to the recession, was the real estate sector. The low interest rates in the real estate sector influenced the banks and the financial companies to offer loans to the people without knowing their full credentials. This resulted in loans being offered to the people with no capacity to repay. The housing boom continued for a long period and the companies in the real estate sector were making huge profits. The capital market was in full bloom and the economy was in the upswing. The financial administrators continued to offer the loans to the sub prime group of the population. They thought the housing boom would be everlasting. However, when the time of the repayment of the loans came, the problem started. The sub prime group of people was unable to pay off the loans and the houses were provided back to the banks and the financial companies. In the meantime, the prices of the houses were lesser as a result of the excessive supply. The banks and the financial institutions had a huge supply of the houses and they had to sell for lesser prices than their mortgage rate. Some of the banks and the financial institutions preferred to hold the houses. This resulted in huge losses to the banks and the financial institutions and they became susceptible in the offering of loans. There was a severe credit crunch in the economy and most of the companies were affected by it. The banks and the financial companies were the first in this regard and some reputed names in the industry like the Lehman Brothers went bankrupt. The bankruptcy of some of the biggest names in the industry had an effect on the performance of the capital market. The companies in the other sectors of the economy suffered due to the stringent measures of the banks in the giving loans. The companies tried to cut costs and there was huge downsizing of labor. The unemployment rate was high and the general conditions of the economy were bad. As globalization of the economy was prevalent, the effects of the recession spread to every corners of the globe. The causes of the recession were due to the policies of the banks and the financial companies. They were unable to gauge the effects of giving loans to the sub prime lenders. When the group of people was unable to pay the loans back, the economy was engulfed in recession. The recession was further aggravated by the growing inflation. The growing rate of inflation was the cause for the rise in the money supply in the economy. Another factor for the rise in the recession was the rising prices of oil. The combined factors of the mortgage loans, inflation and the price of the oil were the causes for the recession. The US economy is one of the most important components in the global economy and most of the economies in the world were dependent a lot on the economy on the US. The US Dollar was the most preferred currency of the world. The UK economy was dependent to a lot extent on the USA and with the globalization of the economy; most of the companies were operating in more than one country. The companies of the USA, which were operating in the UK, were the causes of the recession in the UK to a large extent. The banks and the financial institutions of the UK operated in a similar fashion to that of the US and the occurrence of the sub prime loans was similar to that of the USA. The UK economy was engulfed in the recession due to the similar recessions to that of US. (Charles, 23rd March, 2009; Recession 2008, n.d.) Effects The effects of the recession were visible all over the world. The general effects of the recession had a severe effect in the economy of the world and that of the UK. The general effects of the recession are the increase of the unemployment rates in the economy. As there is an increase in the unemployment rate, the general level of income of the people decreased and the people decided to cut their consumption of items other than the necessary goods. This is responsible for the decrease of GDP of the country. The decrease in the consumption in the economy results in the cost cutting measures of the company and the company cuts the costs by downsizing the workforce. This is a cyclical movement. The recession results in the efforts of the Government to increase the supply of money in the economy. The efforts of the Government are important for controlling the effects of recession. The stock market of the economy falls and huge parts of the society becomes dependent on the Government welfare measures. The recession in the economy results in the degradation of the society. There are more family break ups due to the financial pressure in the society. The health system crumbles and more and more people look to utilize the Government welfare schemes. The crime rates in the society increases due to the pressure of the financial turbulence. In the case of the businesses, the recession helps in the rise of the entrepreneurs. The manufacturing sector suffers as the spending of the society decreases. However, the suffering of the manufacturing sector is less than that of the service sector. People tend to decrease on the spending and they tend to spend on the necessary goods. The investments become rational and the service sectors suffer due to it. The retail industries, hotel and the travel industries are the sufferers. The business houses and the general travelers decrease their spending on the traveling and consumer durables. The companies in the public sector also look for cost cutting measures. These effects of the recession were prevalent in the recession in the latter half of the 2000 and UK economy was one of the many countries to suffer. The Government of the UK put in some measures to have a control over the economy of the UK in the midst of the recession. (The effects of recession and those most at risk, October, 2008) Government measures The recession results in severe credit crunch in the economy and the society and the business world suffer. The effects described in the earlier paragraph reveals that the society and the economy of the country need substantial Government effort to tackle the effects of the recession. The economy needs the business houses and the society to increase their spending to rectify the ill effects of the credit crunch. However, the business houses and the society in general are not in a position to increase their spending. The Government must help the society and the business world by giving financial stimulus to the economy. The Government should lower the taxes and give financial stimulus to the economy. The Government should be decisive in its actions and should work fast. The efforts of the Government in curbing the effects of the recession are important and the example of Japan can be cited in this regard. Japan was engulfed in an economic recession and depression was due to the inabilities of the Government and its policies. The Government of the UK understood the importance of the measures taken by it and made its intentions clear with the first traces of the recession in the USA. Fiscal Measures After the bankruptcy of the Lehman Brothers in the USA, the Government of UK and the Bank of England decided to cut the interest rates by 0.5 pc from 5 pc to 4.5 pc. This helped in the lowering of the mortgage rate and reduced the burden of the house owners. The lowering of the interest rates was the steepest in the history of the Bank of England. The Monetary Policy Committee (MPC) of the UK put 75 billion pounds in the economy and the money was utilized for the purchase of the Government bonds. The system of the MPC was known as the “quantitative easing” (QE). The QE was further amended to increase the level of 125 billion pounds and later to 175 billion pounds. The MPC said that the QE was working and it was instrumental in easing the pressure of the economy. The fiscal stimulus of the Government of the UK was instrumental in easing the pressure of the economy. Tax cuts and financial schemes During the advent of the recession in the USA and the UK in 2008, the Government of the UK put in some changes in the policies of the budget. The tax measures of the Government were revamped to help in the increase of the spending of the Government. The VAT system of the country is one of the main components of the Government earnings. The budget of 2009 published by the UK Government put in the measure to decrease the rate of VAT from the previous 17.5 pc to 15 pc for the period of 31st December 2008 to 31st December 2009. The cost of the Government for the measure was 12.5 billion pounds and the Government put in the measure to encourage the spending in the economy. The financial crisis of the global economy put the British pound devaluated and according to some of the economists the devaluation of the pounds was good for the economy. The pound was worth $2 in 2007 but it decreased $1.37 in 2009. However, the measures of the Government ensured that the value of the pounds increased at the end of 2009. The manufacturing sector of the car industry was suffering the worst slump in its history and the Government introduced the Car Scrappage Scheme. Under the scheme, the Government and the car industry provided 2000 pounds- for the exchange of the old car for a new one. In the April of 2008, the Government introduced the “Special Liquidity Scheme” to allow the banks and the financial companies of the country to free up the illiquid debts. Under the scheme, the banks and the financial companies of the country were allowed to trade good quality securities supported by mortgages for the Government treasury bills. The market was illiquid and there was dearth of confidence on the financial markets of the country. The banks were reluctant in lending and this affected the general flow of the economy. The idea was to make the banks and the financial institutions start the lending process all over again, which will benefit the economy. In case of direct taxes the Government announced $2.7 billion tax cut. The Government also took measures in the recapitalisation of the banks of UK. The bail out of the banks and the financial companies cost the Government huge amount of debts and it counted for 38% of the GDP of the country. In the 2010 budget, Alistair Darling, the Chancellor of the UK Government announced that the economy of UK was surviving the effects of recession and the economy will see a growth of 1-1.5%. The rural areas are to be developed to ease the pressure on the cities. There will be an investment of 2 billion pounds. The banking system of the country provided 38 billion pounds to the SMEs in 2009, which will go up further. The Government will increase the investment allowance to 100,000 pounds and there will be substantial relief in the capital gains taxation. This has been done to encourage innovation in the business world. The Government has been doing its bit in tackling the recession and it has put in substantial fiscal measures and tax cuts in the economy. (McFall, n.d.; Pimlott, 24th March, 2010; Britain is still in recession: the emergency measures propping up the economy, 23rd October, 2009) Effects of the Government measures One of the most severe effects of the recession is the rise of the unemployment. The unemployment rate in the midst of the recession continued to rise and it needed Government measures to tackle the situation. The chart below details the unemployment rate during the recession. However, the Government measures put an end to the rise in the unemployment rate. In the latter half of 2009 and at the start of 2010, the unemployment rate in the country fell. In January, the unemployment rate fell by 33,000 and the figure stood at 2.45 million. The claim of the jobseeker’s allowance decreased by 32,300 and stood at 1.589 millions in February 2010. The decrease of the unemployment in the economy augured well for the stock market. However, the other side of the data revealed that the employment rate fell by 54,000 in the quarter. The report also showed that 8.16 million people were economically inactive. This figure showed that many people retired or went on a leave during this period. The job market was recovering and that was showing in the figures. According to George Buckley, economist of Deutsche Bank, “It is looking a bit better, claimant count falling both in the rate and also the level which reversed the surprising rise we saw the previous month. It just confirms the labour market has done better in this recession than we thought it would.” (Labour market, 21st April, 2010; Monk, 17th March, 2010) Source: Office for national statistics, 21st April, 2010 Source: Office for national statistics, 23rd April, 2010 The GDP of the country suffered a lot during the recession. The effect of the recession in 2008 ran the GDP of the country into negative growth. However, during the last quarter of 2009, the GDP ran into positive and it increased by 0.4%. In the next quarter the GDP increased by 0.2% and this was due to the bad performance of the service sector. The manufacturing sector stood up and it was the reason for the good performance of the economy. This proves that the measures put in by the Government had the desired effect and the economy was performing well. It stood up to the pressures and recovered the effects of the recession. (GDP growth, 23rd April, 2010) Recommendations The Government put in some measures to control the effects of the recession and the results were commendable. However, the changes were not fast enough and the economy did not attain the highs of the pre recession period. The Government should have been more accurate in the measures and there should have been more tax cuts. The indirect taxes like the VAT were cut. The Government should have been straightforward in the cutting of the direct taxes. In the category of the direct taxes, the slabs have been moved a little bit higher. Moreover, the allowances for the married couples have been removed. This put pressure on the economic conditions of the country and the Government should look into the matter. The married allowances should be reintroduced to ease the pressure and the income limits for the tax related purposes should be made higher. (Rates and allowances- income taxes, n.d.) The real problem for the country was unemployment. The tax structure did not do much to ease the pressure on the economy. In the case of the businesses the Government should have given subsidies to the manufacturing and the retail sectors more to ease the pressure of the credit crunch. The main reason for the recession was the lending of the banks and that made the banking system break down. The Government should apply a mode of control over the banks and the financial systems and the key areas of the financial system should not be left to the private sectors alone. The Government should have some measures of control over the operations of the banks. The rules and regulations governing the bank and the financial companies should be more stringent. References: 1. Recession. (n.d.). Investor Words.Com. Available at: http://www.investorwords.com/4086/recession.html (Accessed on 5th May, 2010) 2. GDP growth. (23rd April, 2010). Office for national statistics. Available at: http://www.statistics.gov.uk/cci/nugget.asp?id=192 (Accessed on 5th May, 2010) 3. Labour market. (21st April, 2010). Office for national statistics. Available at: http://www.statistics.gov.uk/cci/nugget.asp?id=12 (Accessed on 5th May, 2010) 4. Monk,E. (17th March, 2010). Unemployment plunge boosts economy hopes. This is money. Available at: http://www.thisismoney.co.uk/news/article.html?in_article_id=501237&in_page_id=2&ct=5 (Accessed on 5th May, 2010) 5. McFall,J. (n.d.). Government must be bold to deal with recession. Guardian.co.uk. Available at: http://www.guardian.co.uk/politics/blog/2008/oct/24/economy-taxandspending (Accessed on 5th May, 2010) 6. Pimlott,D. (24th March, 2010). UK’s Darling delivers budget for growth. CNN. Available at: http://edition.cnn.com/2010/BUSINESS/03/24/uk.budget.ft/index.html (Accessed on 5th May, 2010) 7. Britain is still in recession: the emergency measures propping up the economy. (23rd October, 2009). Telegraph.co.uk. Available at: http://www.telegraph.co.uk/finance/financetopics/recession/6413156/Britain-is-still-in-recession-the-emergency-measures-propping-up-the-economy.html (Accessed on 5th May, 2010) 8. The effects of recession and those most at risk. (October, 2008). Available at: http://www.suffolk.gov.uk/NR/rdonlyres/320E5D8B-E2DE-49E8-976A-95C87541D97F/0/EffectsoftheRecessionandThosemostatRisk.pdf (Accessed on 5th May, 2010) 9. Recession 2008. (n.d.). Available at: http://www.fiendbear.com/RECESSION.html (Accessed on 5th May, 2010) 10. Charles. (23rd March, 2009). Recession – its causes and effects. Finance news pro. Available at: http://www.financenewspro.com/recession-its-causes-and-effects/ (Accessed on 5th May, 2010) 11. Rates and allowances- income taxes. (n.d.). HM Revenue and customes. Available at: http://www.hmrc.gov.uk/rates/it.htm (Accessed on 5th May, 2010) Read More