Evaluate the extent to which government economic policy may have influenced the rate of growth of the UK economy in recent years.

An example of a monetary policy the government had undertaken in recent years is the change in interest rates to affect aggregate demand. This affected our economy as we went into a recession. In the August 2008 the interest rates were at 5% and by March 2009 0.5%, this would mean that businesses would invest less as they get a lower return and consumers would not save, they would spend. This type of policy intention was to help make the economy grow as consumers were spending more and therefore aggregate demand would be shifting outwards resulting in a movement from a to b on the PPF diagram; however the rate of interest didn’t influence the rate of growth as banks were more influenced by the global financial crisis and continued to set their interest rates higher even though the base rate was lowered. The economy failed to grow and ONS figures for November 2009 showed that the economy had shrunk by 4.9% making the 2008-2009 recession the longest since records began. More recently however, in the first quarter of 2012, the UK economy entered a double-dip recession posting three negative consecutive quarters of growth. There was a decline in the productivity of British businesses and by the second quarter the UK economy and contracted by 1.2% this however all turned around in August when services showed increased expansion while manufacturing posted growth of 3.2% in July, the strongest since July 2002. Industrial production increased 2.9 %, the strongest since February 1987. This data therefore shows that even though the government intervened by trying to influence banks to change the interest rates, the banks didn’t complement the base rate which meant that this was being passed onto consumers and even though businesses were still investing meaning that the manufacturing industry was continuing to grow all of this ultimately contributed to the economy continuing to shrink.

An example of another demand management policy is the fiscal policy. This includes taxation such as VAT. VAT rose from 17.5% to 20% on the 4th January 2011. It was introduced in order to gain more tax revenues and therefore improve the government’s deficit. This would mean if there is the same level of demand the government would have more money to be able to put back into the economy. An increase in VAT was likely to reduce demand in the economy as price level rose. This would essentially mean that a shift left would happen in aggregate demand and therefore a lower rate of economic growth.

An example of a supply side policy that is aiming to help the economy grow is the government investing £1m by the government as they introduced on the 01/10/2012. The business bank is designed to expand lending to smaller firms currently starved of loans from Britain’s main lenders. This investment will help the smaller businesses expand and therefore create many more jobs. A rise in employment will lead to more incomes and therefore more consumption. Another example is them spending on schemes to help economic growth such as the business link scheme. This was introduced many years ago in order to help businesses set up more quickly and effectively. This type of introduced policy will have increased productivity by introducing more jobs in the labour market and therefore a higher level of economic growth.

All three of the government policies mentioned were put in place to influence the economy to grow through various ways. The first one was affected by the lack of confidence the banks had to reduce the rate due to the financial crisis resulting in the economy contracting. The second policy of increasing taxation could have a rebound effect of consumers purchasing less as the prices will have rose which will therefore mean that the deficit wouldn’t have been improved and the government can’t reinvest this money into the economy. The third policy is by far the more beneficial for economic growth as the government are increasing their spending which will encourage more spending within the economy.