Evaluate the strategies adopted by the government to help businesses to survive the recession

A recession is a decline in a country's gross domestic product (GDP) growth for two or more consecutive quarters of a year. A recession is preceded by several quarters of the slowing down of growth in GDP. An economy which grows over a period of time tends to slow down in growth as a part of the normal economic cycle. An economy typically expands for 6-10 years and tends to go into a recession for between about six months to 2 years. It normally takes place when consumers lose confidence in the growth of the economy and spend less. This leads to a decreased demand for goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment. Investors spend less as they fear stocks values will fall and thus stock markets fall partly due to negative sentement.

Recessions are cyclical, as the economy works in peaks and troughs. When the economy became ‘overheated’, the recession was a natural way for certain aspects of the economy to ‘cool off’, or so to speak, e.g., inflation, the exchange rate, etc.

When the US sub prime mortgage scandal was made public, a downturn was on its way. US banks and mortgage companies were lending money to the American “sub-prime market”. These banks had sold a lot of the debt around the world to get the risk off their shoulders, and many British and European banks bought it. These ‘bad debts’ could not be paid and so the British banks lost money too.

British banks lost money, so their share prices fell, others noticed the share price falling and sold too, thus fuelling the downward spiral. If one bank is falling in value, whatever caused this might affect other banks, so their share prices fall also – even if they were financially sound. Also, like the US the UK banks had been lending money to the lower classes and overly ambitious business start ups. The UK banks also made a substantial amount of money selling sub-prime loans (self-certification mortgages) – too. These buy-to-let mortgage products were based on projected earnings from rental income and ever increasing house prices. It was inevitable that a recession would come along sooner or later and that this system would collapse.

As banks fail, the lending to companies dries up and companies who were overly reliant on the favourable conditions of the boom failed – Woolworths and MFI for example. People lost their jobs, which meant that they spent less. Retail spending went down, more shops and industries closed, and so the cycle continued. The current government budget deficit is approximately £178 billion.

There are two schools of thought as to how a government should respond to such a recession. Laissez faire encourages the government to spend less, so that taxes need not be higher, interest rates will be low and competition between businesses will be high – thus breeding a highly competitive business environment with finance easily available for business start ups, etc. The other, interventionism, encourages government spending and aims to intervene in the economy by introducing many schemes to try and kick-start the economy. This works by people being given help, e.g. by training/education to start work again, or ...

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Laissez faire policies adopted during the current recession

Stamp Duty exemption

Stamp Duty Land Tax was introduced in December 2003 and replaces the old stamp duty on purchases of flats, houses and other land and buildings. It is a percentage paid on the purchase of a home or non-residential property, graded into bands, which start at £125,000. Usually, 0% interest is paid on properties below £125,000 and 1% is paid on properties between £125,000 and £250,000. However, from early September 2008, until 31 December 2009, properties worth up to £175,000 (rather than the usual £125,000) were exempt from this duty. In practical terms, this saves buyers up to £1,750. Its aim was to encourage homeowners to move house in the credit crunch (targeting the demand side of the economy). Its success is debatable, with home sales hitting record lows in late 2008/early ‘09.

Quantitative Easing and slashing interest rates

The Bank of England slashed its interest rates to 0.5% in its March meeting. At the same time, it announced its programme of quantitative easing – electronically creating money to the tune of 200bn, since November 2009, which it would spend on buying up government bonds. Thus, borrowers are better able to pay off their repayments (due to the lower interest rates) and businesses are able to refinance their debts at cheaper rates (thus increasing their competitiveness and stimulating the economy via the supply side). Thus everyone will be more confident (“apart from the poor old savers” – Heather Stewart, Observer’s economic editor), and the economy may thrive once again.

Reducing the rate of indirect taxation via VAT

The Government temporarily decreased the rate of VAT from 17.5% to 15%. This targeted the demand side of the economy – increasing demand for goods, thus hoping to stimulate growth in the economy.

Interventionist schemes adopted during the current recession

Scrappage Scheme

The Scrappage Scheme discounts the price of a new car by £2,000 if you trade in a qualifying old car. It was first brought out in May ’09. The scheme was originally due to end at the end of February ’10 and was allocated £300m by the Government. The Business Secretary announced that a further £100m would be allocated to extend the scheme to cover 100,000 more cars and vans. The motor industry had called for the extention, over concern that sales would collapse once the money had run out. The scheme aims to target the demand side of the economy, increasing it by offering incentives to car buyers.

Bailing out the banks

Under the plan, at least £300bn (or just over, according to Robert Peston) would be made avaiable to banks under what is known as the Special Liquidity Scheme that was set up by the Bank of England earlier this year, as the Treasury will “extend and widen” its facilities for banks to stabilise the financial system.

The Treasury is also making available £50bn to a select few banks, should they need to repair their balance sheet. The banks involved in the plan would be financed by the Government, who would take shares in the bank through so-called ‘preference shares’. The Government is commited to help banks refinance short and medium term debt, to help restore confidence in the banks, increasing lending and spending and regenerating the economy. Thus, it is targeting the supply and demand sides of the economy.

Government Youth Employment Schemes

The Flexible New Deal is an employment scheme that aims to help one find employment if they’ve been unemployed and claiming Jobseeker’s Allowance for 12 months or above. The aim of the FND is to help people find jobs, or get the training or work experience they need to help them find a job. This is particularly important now, considering that there are 2.4bn people unemployed in the UK, 1m of which are under 25 years old. The scheme aims to stimulate the supply side of the economy, i.e. supplying more labour for industry.

The FND is run for JobCentre Plus by organisations called providers (e.g. local authorities and private companies who finance the scheme).

At present, the FND applies only to certain parts of England and Scotland – and to the whole of Wales. The FND will be extended in October 2010 to cover the whole of Great Britain.

In the areas where it currently applies, the FND replaces the New Deal (18-24 initiative; 25 and over; and New Deal 50 plus). The New Deal for Lone Parents and The New Deal for Partners will continue.

The Flexible New Deal can last for up to 78 weeks and it is compulsory. If the terms apply to you, i.e. if you are aged 18-24 and have been claiming Job Seekers Allowance for over 6 months you must participate in the deal. If you are 25 or over but under 60 and have been unemployed for 18 months or more, you have to take part in the New Deal 25 plus scheme. If you refuse to take up any of the options offered, do not take part in Gateway to Work or do not carry out steps agreed with yoru personal adviser, you may be sanctioned.

As part of the scheme, participants will

talk with their provider about the help that they need to find a job
work with their provider to draw up an action plan of things that they will do to improve their chances of getting a job
do work experience for four weeks

Conclusion

The Government has adopted both interventionist and laissez-faire approaches towards dealing with the recession. Notably, laissez-faire approaches tend to target the demand side of the economy, whereas interventionist approaches tend to target the supply side of the economy (the Scrappage Scheme is an exception to this rule). Interventionist schemes involve the Government spending money, which it has ultimately attained via a fiscal policy of high taxation. Laissez-faire schemes involve the Government reducing its taxation and spending in order to stimulate growth by making more money available for the consumer to spend. Thus, it is obvious that the government has spent more money on interventionist schemes, but this does not mean that it has necessarily adopted a more interventionist approach.

It would seem that the Government has focused more on interventionism than laissez-faire approaches however, as approaches of the former nature have been carried out for longer than those of the latter nature. One could argue that such an interventionist approach is merely short-termism – and unsustainable in the long-term, as the economy relies on the Government’s money for support. Maybe laissez-faire is better off for the long-term. Perhaps this style of interventionism is only to be expected from a more left-wing Government such as Labour – undoubtedly the Conservatives would probably have dealt with the recession in a slightly different manner, most likely adopting a more right-wing, laissez-faire approach.

There has been mixed success of the Government’s attemps to help our UK businesses survive the recession. The fact that Britain’s GDP has grown by 2% in the last two consecutive quarters is an indicator of a general success on the part of the Government and that Britain is (hopefully) making a recovery from the recession – although there is speculation that there may be a ‘double dip’ and we may re-enter the recession if we do not continue the effort to stimulate the economy.

Despite criticisms of the Stamp Duty Holiday mentioned above, it has generally been well received (Churchill Investments director Chris Gilchrist said: “The stamp duty holiday for the first-time buyers obviously did work so let’s get rid of it completely. I think then we would definitely see a good effect on the first-time buyer property market.”)

The argument about quantitative easing is polarized: some critics complain of inflationary "money printing"; others complain that too little attention is paid to the flow of credit.

Leader of the opposition, David Cameron has criticised the reduction in VAT, -- “On Friday, Mr Cameron cited figures from the latest Retail Insight Report, which suggested retail footfall was down 3.1% in December from a year earlier.

"This government, that lectured us about prudence, has spent £12.5bn of our money... and wasted it," he told the BBC.”

But the government has defended the decision to reduce VAT from 17.5% to 15% until the end of 2009. It says the cut was the fairest way to get money into the economy because low-income households spend a larger share of their income on VAT than richer households do. (BBC News)

The Scrappage Scheme has been very well received – ““The scheme has contributed to the 13.5% jump in car manufacturing and the first growth in new car registrations since April 2008.” (11/08/09). Although, there has been criticism of the scheme for not including the ability of participants to get a discount on pre-owned cars.

Critics of the bank bail-outs have noted that rescuing the banking system has cost the equivalent of more than £5,500 for every family in the country, an official audit has found. (Telegraph, 3/12/09). Others have said that there is simply no alternative for the banks, in order for them to override the financial turbulence.

Regarding the Youth Employment Scheme - "We have both a moral obligation and an economic need to make sure that young people involuntarily without jobs aren't lost to work," Business Secretary Lord Mandelson told the BBC.

He said that the campaign meant the government would help companies train young people and include mentoring and internships, depending on the age.

But its success depended on the private sector, Lord Mandelson added.

"The government cannot deliver these opportunities by itself," he said.

More than 150 employers, including Microsoft and Pfizer, are said to be supporting the campaign, which has largely been a success.