ECON2001 Economic Policy and the Global environment : of Governmental

Discuss the policies which a government can implement to achieve long-term economic growth and macroeconomic stability in the short-run.

To address the above questions, you will need to support your discussion and view(s) by showing the evidence upon which they are based. Such evidence may include the
economic policies of country (ies) chosen for illustration, what the governments have specifically done in order to achieve economic growth and macroeconomic stability. Some of these evidences presented may be open to several interpretations, hence you should try to demonstrate why a particular argument is preferable to other interpretations in supporting your point of view.

 

Assignment Guidelines

 

1. This is an individual-written assignment.

2. The essay should be between 1,400 and 1,600 words.

3. More marks will be awarded for reports, which demonstrated more comprehensive knowledge of economic policies and the global environment and in-depth
understanding of the economic issues involved.

4. Assignments should be type-written using 12-font size and 1.5 line spacing. Please include page number.

5. References are a key aspect of an essay. Any idea, theme, or argument that you found in the literature and used in your essay must be cited within the essay.
6. Include a Reference List and Bibliography at the end of your assignment.
7. Please also attach the SafeAssign report (the page with the similarity percentage ONLY).

Answer

Introduction:

In 2007-2008, the global financial crisis has adversely affected many countries after the Great Depression of 1930s. The financial crisis has started in 2007 in the United States and consequently the world has experienced international banking crisis after fail of the Lehman Brothers, an investment bank, in 2008 (Haas and Lelyveld 2014). In this year, banks have restricted their requirements of lending. This economic phenomenon has various negative impacts on financial institutions, households, banks, businesses and the world economy. In addition to this, banks have lost huge amount of capital while consumers have lost faith on the entire financial system. One of the chief sources for commercial banks’ funds is consumer deposits. Hence, a reduction in consumer’s confidence has led the shortage of funds. This in turn has affected future profits of banks in an adverse way as capital requirements and regulatory have become strict which further has decreased some profitable opportunities of previous times. This has happened because losses of many banks cannot be found. This crisis also has affected business activities all over the world as demand for goods and services of those entities have decreased when consumers have felt reluctant to spend for future uncertainty regarding state and job prospects of the economy (Ryder 2016). Thus, this financial crisis has influenced the world economy and consequently the total value of products has decreased. Moreover, unemployment has increased in various countries while government revenues have decreased during this period. This report has focused on the impact of financial crisis on United Kingdom.

Financial crisis in the U.K:

The impact of financial crisis on the U.K’ economy has remained higher compare to that for some other countries. This happens due to some certain reasons. For instance, the U.K has not possessed any large manufacturing base though earlier growth has occurred due to growth of financial services along with financial activities that have included a surplus of house purchasing and retail sales by large amount that have been varied, based on credit (Mason and Harrison 2015). Thus, this type of growth has lacked substance and has remained specific to the U.K. This in turn has implied that when prices for house have started to decline along with shortage of credit, the U.K has suffered significantly and has felt long-term consequences. After this phenomenon, financial reports have stated that the U.K has depended mostly on the service industries and has not invested huge amount of money in business sectors (Lins, Servaes and Tamayo 2017). However, many economists have pointed out that the impact of this financial crisis is less severe compare to the first one of 1930s. This is because, recession at this time has occurred due to consumption and not on production.

Economic growth of the U.K:

Due to adverse impact of the world economy in international market, economic growth of the U.K has influenced significantly. As a result, the economic growth has decreased by large extend between 2007 and 2008 (Aalbers 2016). This can be described with help of following diagram.

                                                                      Figure 1: Economic growth of the United Kingdom during 2007-2008

                                                                                                    Source: (Tradingeconomics.com. 2018)

The above diagram has represented that after 2007 growth rate of this country has started to decline drastically and has reached at a lower level in 2009 (Tradingeconomics.com. 2018). However, after this year, the country has started to recover its economic condition significantly.

Losses of bank and bankruptcies:

When some big banks have started to decline, the U.K banks have also started to experience internal losses and consequently banks have bank-to-bank lending have started to decline. Some financial institutions that have continued to borrow money from banks, have observed that the rate regarding interbank lending have doubled overnight (Berger, Imbierowicz and Rauch 2016). Moreover, costs related to insuring credit have increased and when the lending has decreased, different types of business sectors have started to decline. However, the housing industry has suffered more compare to others. 

Unemployment rate:

During financial crisis, the U.K economy has experienced another impact in its labour market. The decrease in sales of houses and spending in the retail sector has led various companies like Woolworths and MFI to reduce its number of employees. This further has decreased amount of tax revenue of the U.K government and consequently public expenditure has reduced (Parmar, Stavropoulou and Ioannidis 2016). Hence, the government cannot increase its economic growth efficiently through proper spending on public services. This process has continued further and consequently GDP growth rate of U.K has decreased constantly for a fourth consecutive quarter at the end of 2008. This economic phenomenon has implied that the country has fallen in recession.

                                                                                                            Figure 2: Unemployment rate in U.K

                                                                                                           Source: (Tradingeconomics.com. 2018)

The above figure has described that unemployment rate has increased after 2008 in U.K and has remained high for more than five years. However, after 2013 this rate has started to decline (Tradingeconomics.com. 2018). Hence, based on above figure it can be said that many companies have reduced their number of employments due to slow economic growth and uncertainty in business sectors for upcoming years.

Impact of global financial crisis on society of U.K:

The global financial crisis has negatively influenced poverty and communities in the U.K. From this economic phenomenon, various economists have intended to draw a relation between global crisis and poverty level of a country. The recent global financial crisis of 2007-2008 has led the prices of food and fuel to increase by large amount. Moreover, in 2009 the country has faced economic recession for which income of people have declined in three economic sectors. Employers and local business organisations of different scales have been affected adversely due to various reasons. Large employers, who have conducted their business in international as well as in domestic markets, have been affected directly(Cowling, Liu, Ledger and Zhang 2015). However, diverse global links have helped those employers to survive and recover their conditions after this crisis. This financial crisis not only has reduced number of employments but also has forced people to travel further for searching jobs in other countries. Moreover, people have felt comparatively less secured regarding their jobs while traders and self-employed people have experienced uncertainty at the time of earning money (Pontusson and Weisstanner 2018). This impact has also seen in public sector and consequently number of employments has reduced in both private and public sectors.

The global economy can influence poverty from other aspects that have worked indirectly. People with low-income group has affected adversely as cost of living has increased due to increasing prices of foods and fuels in international markets. Consequently, they have started to purchase products with comparatively cheaper quality that has included frozen and fast foods (Pearson and Elson 2015). Moreover, people during this time have decreased their number of travels and electricity consumptions. Hence, from this discussion it can be said that people have changed their consumptions in daily life and have enjoyed lower standard of living.

Governmental policy:

As the global financial crisis has affected the U.K directly, the government of this country has implemented some policies to sustain during this period. Those policies can be differentiated under some headings that can be described as follows:

Interest rates:

In U.K, the Monetary Policy Committee under the bank of England has set interest rates independently rather than the government of this country. Consequently, interest rate of has been reduced by from 5% to 0.5% between September 2008 to March 2009 and this rate has remained minimum in over 300 years (Evers, Miller and Spengel 2015).

Quantitative easing:

In 2009, the Bank of England has declared about the policy of “Quantitative Easing” (QE), which has tried to increase the activity level in the economy. Monetary policy, under normal circumstances, operates based on the interest rates fixed by the bank of England. However, in 2009, this rate has reduced by 0.5%, which has left less scope for the central bank of U.K to reduce interest rate further (Ricci 2015). As the traditional monetary policy has experienced constrain, the central bank of this country has adopted an unconventional QE policy. Under this system, the bank has created money to purchase assets, especially government bonds that in turn have helped economy to increase its money supply. The government has expected that this phenomenon can develop economic activity through encouraging banks for further lending and to consumers to spend more. Initially, the QE level has set at £75 billion though this has increased further for several reasons and in 2009; it has become £200 billion (Papadamou, Spyromitros and Kyriazis 2017).

The Labour Government:

The government of U.K has applied fiscal policy in the form of public spending and tax to meet economics objectives. Measures of fiscal policy can be segmented into two groups, which are, discretionary measures and automatic stabilisers (Baker, Bloom and Davis 2016). Automatic stabilisers represent a slow economic condition when spending of the government increases as tax revenues decreases. This further helps economy to develop further. This automatic stabilizer does not require any government policy while discretionary measure requires this.

In 2008, the Labour Government of the United Kingdom has introduced discretionary fiscal measures in its Pre-Budget Report (PBR) to assist the economic condition. The chief element of this policy was to cut VAT rate temporarily from 17 ½ % in 2008 to 15% in 2009. However, this VAT rate has again increased and has become 17 ½ % in 2007 (Dijkstra, Garcilazo and McCann 2015).

Government policy for small business:

The government in its Pre-budget Report has declared a range of schemes to assist small firms during this period of financial crisis. Some of those schemes have newly applied while some of existing policies have modified while some other policies have implemented by other agencies, for instance, European bodies like the European Investment Bank and the Regional Development Agencies (Cowling, Liu, Ledger and Zhang 2015). The government has provided financial support in the form of bank lending to business in the form of three sections, which can be described as follows:

Enterprise Finance Guarantee: The government has provided a 75% guarantee regarding bank lending to those firms that have turnover less than £ 25 million (Cowling, Liu and Zhang 2016).

Working Capital Guarantee: This is a type of ‘matched’ scheme, where government of the U.K has supported risks associated with banks on their existing capital lending and this in turn have influenced them to increase lending on other companies using those capital  up to  £10 billion (Mason and Harrison 2015).

Capital for Enterprise Fund: Enterprise Fund has provided long-term capital to business organisations, which have exhausted finance based on traditional forms. For this, various funds commercial banks of the U.K have contributed the fund around £75 million (Cowling, Liu and Zhang 2016).

Banking:

As the banking sector has played a vital role during this financial crisis, the government of this country has done dual jobs for dealing with some specific banks along with some broader problems regarding monetary system.

Northern Rock Bank (NRB):

In 2007, the NRB has experienced market difficulties for which the Chancellor has provided a statement stating that the government is going to provide guarantee regarding deposits in NRB. The Treasury has declared more protections for customers of this bank. Moreover, the bank has also provided facilities during short term through giving liquidity assistance from the Bank of England. The government has tired that to find a private sector solution expecting that other bank may purchase NRB. Hence, the government of the U.K has focused on the privatisation of banks rather than nationalising them. The bank has taken long time to deal with this situation.

Bradford & Bingley (B&B):

This bank has also experienced enormous pressure when investors and lenders have lost their confidence on the performance of it as an independent institution. The government has dealt with this bank easily. Its operations have been divided into two segments. The half of deposits has been transferred to Abbey while the remaining parts of this business such as mortgage lending have been nationalised and moved to the Treasury.

London Scottish Bank (LSB):

In the sub-prime retail market of U.K, this Manchester-based small and specialist finance house has provided loans. This bank has around £250 million deposits and 10000 savers. In the end of 2008, the LSB has gone into administration though the government cannot provide any official rescue package. Consequently, the government has remained unable to provide guarantee to all deposits of LSB’s customers.

Financial Advice:

The government of U.K has intended to make strong financial advice for mortgage holders through increasing mortgage arrears and repossessions. As a result, this public institute has declared a series of measures for giving further supports to homeowners. For assisting mortgage costs, the government has started a scheme to provide financial assistance for family members, who have remained unable to find a job and have received income assistance, Pension credit or Jobseeker’s allowance (Hoque, Earls, Conway and Bacon 2017). This scheme has covered mortgage interest payments and can be available after certain period of benefit. In 2008, the government has reformed this scheme for mortgagors to give accurate value of people’s property.

Mortgage Rescue Scheme:

In 2008, the government has declared a £2 billion package for houses that has considered increasing schemes of mortgage rescue schemes worth £200 million costs. Those schemes have intended to assist 6000 households for next two years (Aalbers 2016). However, those mortgage rescue schemes have stated that these cannot help those persons, who have borrowed money my large amount.

The Homeowner Mortgage Support Scheme:

The Prime Minister of the U.K has announced a scheme in 2008 to assist those people, who have suffered from a temporary but noticeable loss of income for which they have remained unable to pay their mortgage during a short period like being made redundant (Sikka 2015).  This scheme has considered government guarantee against losses that a lender can incur on his mortgage. Thus, when the borrower has defaulted, the government of this country has paid up to 80% to the lender.

Conclusion:

The above discussion has described about impact of global financial crisis in United Kingdom. This world crisis has started in the U.S.A though the entire world and especially European and Asian countries have affected more adversely. The country has experienced a downfall in its economic growth while unemployment rate has increased significantly. To sustain during this situation and to develop economic growth, the government of this country has obtained various policies related to banking sectors along with other macroeconomic variables like interest rates along with monetary policy and fiscal policy. The government has adopted other schemes to provide financial assistance to citizens of the U.K for purchasing houses.