This report will highlight how Government policy could change to try to: Increase economic growth, Reduce unemployment, Reduce the Balance of Payments deficit, Reduce the inflation to 2.5%.

• Raising mortgage interest payments to reduce homeowners’ real 'effective' disposable income and their ability to spend, so as to encourage saving.

• Business investment may also fall, as the cost of borrowing funds will increase. Some planned investment projects will now become unprofitable and, as a result, aggregate demand will fall.

• Higher interest rates could also be used to limit monetary inflation. A rise in real interest rates should reduce the demand for lending. See Fig 1

                

                    Figure 1                                                 

2. The introduction of Fiscal Policies to increase the rate of leakages from the circular flow and reduce injections into the circular flow of income will reduce demand-pull inflation at the cost of slower growth and unemployment.  This can be undertaken by: -

 

•  A reduction in the amount the government sector borrows each year.
• Lower Government spending.
• Higher direct taxes (causing a fall in disposable income).

3. An appreciation of the exchange rate, a stronger pound reduces import prices.  This makes firms' raw materials and components cheaper; therefore helping them control costs.  This will also auger well for the economy as the Marginal Propensity to Import is 0.5, for every additional dollar increase in the National Income 50% of the monies gained go to import goods and services.  A rise in the value of the exchange rate might be achieved by an increase in interest rates or through the purchase of sterling via Central Bank intervention in the foreign exchange markets.

4. Direct wage controls/incomes policies - Incomes policies (or direct wage controls) set limits on the rate of growth of wages and have the potential to reduce cost inflation.

5. The development of long-term policies such as labour market reforms and supply side reforms.

The key to controlling inflation in the long run is for the authorities to keep control of aggregate demand (through fiscal and monetary policy) and at the same time seeks to achieve improvements to the supply side of the economy.

ECONOMIC GROWTH

Economic Growth is the increase in the total amount of production and wealth in an economy. It refers to an increase in a country's ability to produce goods and services. The advantage of economic growth is that an increase in real national income means more goods for consumption. The British economy has experienced nine years of economic growth since the last recession ended in the autumn of 1992.  Since 1996 the level of real national output has grown in excess of two per cent each year - leading to a large rise in total real Gross Domestic Product and an increase in average living standards.

Economic growth continued to be strong in 2000 - with real GDP growing by 3% during the year. This was largely the result of a high level of consumer spending (up 4.4% on the previous year) and also a 6% rise in capital investment demand. Growth would have been faster but for a surge in the demand for imported goods and services (imports lead to a leakage of spending from the circular flow of the economy).

INCREASING ECONOMIC GROWTH

According to research the four most important determinants of growth of total output are:

1. Growth in the labour force such as occurs when the population grows or participation rates rise.        

2. Investment in human capital such as comes from formal education and on the job experience.  This increases the marketability of the work force and persons wishing to be employed, resulting in higher pay and more disposable income to be reintroduced into the economy.

3. Investment in physical capital such as factories, machines, and transportation and communication facilities.

4. Technological change brought about by innovation that introduces new products, new ways of producing existing products, and new forms of business organisation, which would result in increased output.

The government needs to provide the framework for the market economy by implementing such things as well defined property rights, law and order, sound money and the basic rights of the individual to locate, sell and invest.

The government also needs to provide the infrastructure, such as transportation and communication networks, which are critical to growth in a modern economy. Tax incentives also need to be restructured.

Education and health are important forms of expenditure. We need to invest in further trade schools and other appropriate institutions that would boost the consumer wanting education and also improve the delivery of service. Tax incentives or policies can also be introduced to increase the on the job training within firms.

Finally, emphasis can be placed on poverty eradication or reduction. Poverty has a negative effect on the growth rate of our economy and creates a drain on the economy.

As the country has a Budget Surplus of ₤2bn, which means the government has ₤2bn more in revenue than in expenditure, it is consuming less than it spends.  This money can thus be used to continue the economic growth and sustainability projects of the country.

UNEMPLOYMENT

Unemployment is the number of people at working age who are not employed and are actively seeking employment.  It is measured as a percentage of the total labour force. At present the unemployment rate is 8%, the Natural rate is estimated to be 5%, this means that the United Kingdom is 3% over what the economists would term as full employment, the level at which there is no deficiency of demand. (See Appendix A) Classical unemployment is thought to be the result of real wages being above their market clearing level leading to an excess supply of labour. Economists have described the causes of unemployment as frictional, seasonal, structural, and cyclical.

• Frictional arises because workers seeking jobs do not find them immediately.
• Seasonal occurs when industries have a slow season, such as construction.
• Structural arises from an imbalance between the kinds of workers wanted by employers and the kinds of workers looking for jobs.
• Cyclical results from a general lack of demand for labour. When the business cycle turns downward, demand for goods and services drops; consequently, workers are laid off.

REDUCING UNEMPLOYMENT

The road to full employment starts with monetary and fiscal stability, built on investing in skills and responsibility in the workplace, and demands attention to enterprise, competition and employability as necessary means of achieving high productivity.  A growing economy creates job, both for persons entering and persons wishing to improve their work status, the recession that the economy had in (1980-1981) and (1990-1992), showed a slump in total employment.

See figure 2

Figure 2

Changes in a marketplace include the impact of innovation and changing technology, changing consumer preferences and the changing need for particular skills.  

As a country we need to employ ways to:

1. Make our competition authorities independent and open up product markets.
2. Revamp the physical planning system.
3. Encourage our capital markets by cutting capital gains tax and introducing new incentives for venture capital.
4. Encourage enterprise with lower tax rates for small businesses.
5. Offer new incentives and resources to encourage greater investment, skills, and innovation.
6. Weaken the Trade Union power.

BALANCE OF PAYMENTS

The balance of payments is an accounting of a country's international transactions over a certain time period, typically a calendar quarter or year. It shows the sum of the transactions (purely financial ones, as well as those involving goods or services) between individuals, businesses, and government agencies in that country and those in the rest of the world.  If the balance of payments is in deficit we are spending more foreign currency than we earn by importing more than exporting. See Figure 3

Figure 3

A growing economy means that there will be more goods and services for people to consume. A balance of payments deficit could be caused due to any of the following reasons:

1. A lack of demand for products manufactured by the United Kingdom.
2. An excessive demand by consumers for imported products.
3. An increasing producer demand for capital goods or raw materials.

REDUCTION OF BALANCE OF PAYMENTS DEFICIT

To reduce this deficit we can:

1. Locate substitutes in local products for goods imported.
2. Increase taxation on imported goods as a deterrent.
3. Provide incentives to stimulate the local production and investment in sectors such as agriculture, tourism and cottage industry to name a few.
4. Create investment in natural resources, so as to reduce the marginal propensity to spend.
5. Create policies to enhance local production so that they will be suitable for export.
6. Externalities and Import Controls Protectionism can also be used to take account of externalities and dealing with de-merit goods.  

There are other avenues which government can introduce to have the desired outcomes:

1. Benefit and Tax Reforms - Reducing the real value of unemployment benefits might increase the incentive to take a job - particularly if the real worth of unemployment benefits is well below the national minimum wage rate.
2. Employment Subsidies - Government subsidies for those firms that take on the long-term unemployed will create an incentive for firms to increase the size of their workforce.

PROBLEMS

Growth is not necessarily development. Economists need further information on the distribution of additional income (equity), consequent externalities and impact on sustainability before reaching a final view as to whether growth is development. True development must be sustainable and widely distributed.

1. Economic growth can also result in:

• Increases in pollution noise and congestion
• Excessive depletion of non-renewable resources
• Loss of traditional ways of life amongst indigenous minorities

2. The benefits of growth between income groups and regions may be uneven leading to an increase in relative poverty. Income inequalities may widen.

3. Social effects, as the society becomes more industrialised, violence and crime and other social problems are likely to rise.

4. Environmental costs, a richer society may be more concerned about the environment, but it is also likely to do more damage to it.

5. Effects on the distribution of income while some may increase their standard of living; others may be reduced due to the implementation of policies.

6. Inflation can never be forecast with perfect accuracy. The overall inflation measure is the result of millions of pricing decisions made by businesses large and small. The calculation of the retail price index although extremely thorough, is always subject to error and omission.

7. The exchange rate might also fluctuate due to external economic shocks leading to volatility in the prices of imported goods and services.

The process of economic development requires radical structural change. Typically, all economies develop by shifting resources from agricultural & mining to manufacturing and eventually into the tertiary (services) sector.

Structural change becomes a ‘problem’ when the burden of adjustment falls disproportionately on minorities and regions e.g. those with ‘outdated’ skills that are occupationally or geographically immobile in a given area of our country. The resultant increased income inequality and social exclusion threatens social cohesion.

Problems may result from the policy itself, e.g. neglect of agriculture or excessive urbanisation.

Some of these problems may be relatively easily overcome while others may be virtually challenging. Some may be tackled immediately while others will only be solved in the long run. Some may be within the country's financial capability while others may be overcome with outside help. The relevant arguments depend on the obstacles that have been identified.

The suggestions that were highlighted as it relates to the aforementioned are realistic and feasible as we are operating with a surplus budget, and can be integrated without much change.

There would be an addition to the existing system and not a starting over.  Adjustability of human resources may not become problematic since it may just be an upgrade.  The financial problems would be limited since the changes would stimulate an increase in National Income therefore we invest money to make money.

Britain has a unique opportunity to be, once again, a beacon to the world advancing enterprise and fairness together, a dynamic vibrant economy, attaining high levels of growth and employment that would be the best route to prosperity for all.

BIBLIOGRAPHY

Sloman, J. 2000, Economics, Pearson Education Ltd, England.

Schiller,B., The Macro Economy Today, Library of Congress Cataloguing-in-Publication Data

Lipsey, G., Courant, P., Purvis, D. & Steiner, P. 1993, Economics, Harper Collins College Publishers

Budget and Economic Analysis, Volume 1, #3, House Committee on the Budget, U.S., House of Representatives.

 and speeches/press/2003/press

, newsschool.edu/let/essays/Keynes/keynesrev.htm

GLOSSARY OF TERMS

Aggregate Monetary Demand – Total spending on goods and services in the economy.  It consists of four elements, consumer spending (C), investment (I), government spending (G) and the expenditure on exports (X), less any expenditure on imports of goods and services (M): AD = C + I + G+ X –M.

Budget Surplus - Where tax revenues exceed Central Government expenditure.

Exogenous Money Supply - Money supply that does not depend on the demand for money but is set by the authorities.

Full Employment - The level of national income at which there is no deficiency of demand.

Gross Domestic Product – The value of output produced within the country over a twelve-month period.

Inflation – A rise in the average level of all prices.  Sometimes restricted to prolonged or sustained rises.

Labour Force – The number of employed plus the number of unemployed.

Marginal Propensity to Import – The proportion of an increase in national income that is spent on import.    Mpm = ∆M/∆Y

Marginal Propensity to Spend – The fraction of any increment to National Income that is spent on domestic production, it is measured by the change in aggregate expenditure divided by the change in income.  ∆AE/∆Y

National Income – The value of total output and the value of the income that is generated by the production of that output.

Natural Rate of Employment - The equilibrium rate of unemployment. At the real wage rate W1 in the diagram below, E1 workers are employed. But the total labour force remains higher than the employed labour force. Thus the natural rate of unemployment = AB and consists of frictional + structural unemployment.