By the time Mrs Thatcher had won her third consecutive election victory in mid-June 1987, she had been Prime Minister eight years, party leader twelve years, and had given her name to an instantly recognizable political phenomenon known as Thatcherism (Thatcher experiment). The Thatcher experiment continued through 1979-1990s, the idea of this experiment was to gradually reduce monetary growth, and hence the rate of inflation over a period of time.
Taxation
When Mrs Thatcher took office, her apparently favourite monetarist economist was predicting, that among other things such as unemployment would fall to a large extent. In the event of unemployment falling this caused the inflation to raise sharply and as VAT was raised from 8% to 15%. While the VAT was increased the Manufacturing out put has fallen by a fifth and unemployment had risen by approximately 2 Million. The main effect this has on the economy of taxation for the government are so that they can pay for public goods and to transfer payments these can be headed under Social Security. Also the consumer has to pay more for the goods and services.
The Organisation of Oil Exporting Countries-Crude Oil
In 1973, The Organisation of Oil Exporting Countries (OPEC) first managed to agree a momentous reduction in oil output. Since rich nations needed a lot of oil, whatever the price, in economic speak, their demand was very price inelastic. OPEC calculated correctly that by cutting their output they could make oil scarce and force the price up a lot. When the price tripled in 1973-74, OPEC got rich despite the fact that they were producing less. In reaction to high oil prices, gradually rich countries figured out how to supply a bit more oil themselves and demand a bit less. In 1979-80, OPEC responded to fading oil prices by a further round of output cuts, doubling the price again. By the early 1980s, oil prices were around $30-35 a barrel. But don’t confuse this with a price of $30 in autumn 2000. The scarcity of oil is measured by its real, or inflation adjusted price. To be the equivalent today in real terms of the $30 in 1980, some people have calculated oil prices would have to be about $80 a barrel. Because there was a lot of inflation during 1980-1999, prices had to rise a lot merely to preserve their real, inflation-adjusted value. The effect this had on customers was that they had to pay more for the oil, this had some effect but not that much, inflation did rise but not dramatically. You can see that the inflation did rise in 1979 and 1980 (Appendix 1.1) also the GDP dropped.
Against this background, the fact that after 1982 oil prices fell steadily in nominal terms, and spent much of 1986-99 in the range of $10 to 20 a barrel shows just how much the real price had fallen after the early 1980s.
The enormous North Sea Oil revenues pouring into the exchequer during the mid 1980’s provided scope for a considerable increase in investment. The sharp rise in the value of sterling on foreign exchange caused soaring interest rates making the pound over valued and leaving horrendous possibilities for unemployment and living standards.
Interest Rates
At the beginning of the 1980’s the government introduced high interest rates to try to prevent inflation from escalating any further. This was because people were spending rather than saving, this was causing more and more inflation. Such as during 1981 the interest rates rose to 17% and gradually lowered by a long period of time as you can see in Appendix 1.2. The bad point for people wanting to take out a loan would be the sky-high interest rates they would have to pay back double the amount due. I think that this type of procedure dose work and dose help the economy to evolve steadily but there can also be bad points. Given that interest rates can vary quickly, we assume that the money market is always in equilibrium. If people decide to save instead of spend the people that do the manufacturing of products will decline and the manufactures will produce less because there will be less demand for the goods and services.
Economic Growth
In the years of 1980 and 1981 the economic growth rate was –2.5% in 1980 and during 1981 it was -1.2% as you can see in the Appendix 1.3. This was possibly due to the high interest rates during these years, which you can see in the Appendix 1.2 and also the Unemployment during these years. This is where the main part of the recession happened. There were more people unemployed in these two years and also the interest rates were sky high.
To help the economy grow the Chancellor or the Government will have to keep up the level of demand in the economy. Using your fiscal policy and monetary policy to influence the level of demand can complete this. If you find that the economy is growing too slowly then you can try to boost demand.
To do this you need to persuade spending and so you could either cut taxes or cut interest rates. Either of these will help give people more money to spend, therefore boosting demand.
To increase growth the Chancellor or the Government may consequently have to:
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Cut taxes (direct taxes or indirect taxes)
- Cut interest rates
- Increase the level of government expenditure
However this should be accomplished very carefully as, the level of inflation and demand rises too much, firms may not be able to increase production quickly enough and prices may rise instead of output this can be seen in Appendix 1.1.
Unemployment
The arrangement of uncertain demand policies and poor supply stocks led to a remarkable increase in unemployment, which led to more than 3 million, or 12.1% in the UK. This can be seen in the Appendix 1.1 (unemployment) and 1.3, which shows the UK’s GDP (Gross Domestic Product) trend. The main point of unemployment during the 80s-90s is that the government/Local council paid for Social Security, this meant that the people that where unemployed received benefits such as Income Support, Welfare and job seekers allowance. To a greater extent people thought it was better to stay at home than work.
A Recession during the 1990s
The loosening of monetary and fiscal policies during the 1990 caused a recession in GDP, and inflation increased from 4% in 1988 to 9.8% in 1990.
One major recession during the 1990s was unemployment. Unemployment is caused by a range of short and long-term factors these factors include the following:
The level of economic growth:
Unemployment is strongly related with the overall level of economic growth. It is generally felt that unemployment starts growing when growth is around 3% or lower. On the other hand, when growth is around 4% or higher the level of unemployment falls. Generally a change in the level of economic growth takes a period of around six months to influence the level of unemployment. The slowdown in economic growth between 1990 and 1997 contributed to unemployment drifting upwards in the 9% range, while faster economic growth between 1997 and 2000 brought it back down to 7%. The government has argued that to make significant progress on unemployment, Australia must sustain annual economic growth of 4% or more, indicating that unemployment unlikely to fall in 1999 – 00, given its estimate of 3% growth in this period.
The macroeconomic policies:
The government’s macroeconomic policy settings can influence the level of unemployment in the short to medium term, through their influence on the business cycle. Between 1990 and 1994 the Government had an expansionary macroeconomic policy, with large budget deficits and low interest rates, which were intended to boost economic activity and lower unemployment. The impact of these policies was felt through a substantial lift in economic activity by 1994 and a reduction in unemployment from over 11% to around 8.5% by mid 1995. A shift towards tighter monetary and then tighter fiscal policy contributed to slower economic growth in 1995-97, which resulted in a slight increase in the level of unemployment. Interest rate reductions helped accelerate growth from early 1997, encouraging consumer spending and business investment.
Policy Measures that the Government used during the Recession Periods (1980s-1990s)
Monetary Policy
The Government used the monetary policy for the reason that their aims were to decrease income tax rates and to decrease the basic rate of income tax from 33% to 30%. The Government financed this by increasing the VAT from 10-15% this was not on all goods there was different calculations for different goods.
‘’Increasing the VAT and TAX rate provided a high boost to prices but fed into wage demands and raising high inflation over a period of time’’
Source: D Begg-Economics
In 1980 inflation had risen to 20% this was because of the increase in VAT. The new Government immediately pursued a restrictive monetary policy. The bank of England’s minimum lending rate raising to 17% by November 1979 a few months back the rate was only 12%
Because inflation was so high, the real cost of many monetary aggregates fell very sharply without a doubt. Monetary policy was very restrictive. The way that this affected the economy was through the exchange rate, Sterling’s real exchange rate rising by over 50% in two years from1978 to1980. About half of the rise was due to foreign prices and the other half to an appreciation of t/he exchange rate. The causes of this massive approval probably include both tight monetary policy together with any effects on expectation concerning future monetary policy and also the effects of the North Sea oil.
If the level of interest rates where to be changed by using Monetary Policy this is what would happen:
In finale, we can see this brief period as one in which government policy decisions contributed to both the rise in the inflation rate and the very severe recession that took place during 1980. To help the UK out of recession the government used Fiscal Policy with the Monetary Policy.
Fiscal Policy
Governments may choose to use fiscal policy in times of recession or a general downturn in economic activity. In this situation they will use their fiscal policy to give a boost to the economy this has happened in the years of 1980 to 1983 when the government used the Fiscal Policy to get them out of Recession.
The government used this procedure during the early 1980 towards 1990 this helped by lowering taxes and increasing the level of government expenditure.
This will encourage people to spend more. If they lower indirect taxes then this will lower the prices of the taxed goods and encourage more demand. Alternatively they could lower direct taxes. This will raise people's disposable income (their take-home pay wages) and therefore encourage them to spend more. Either way the level of demand in the economy should rise or help encourage economic growth.
Fiscal policies could therefore include:
- Cutting the lower, basic or higher rates of tax
- Increasing the level of personal allowances (Wages)
- Increasing the level of government expenditure
Supply-Side Policy
Supply-side policies are policies that aim to enhance the capacity of the economy to produce. Fiscal policy frequently acts on the level of demand in the economy. Income tax will always have an effect on people's incentives to work as you can see in Appendix 1.2, in the middle of the 1980s the unemployment was high this was due to the fact that more benefits where coming out such as, Social Security etc which led people to think that staying at home was more beneficial than going to work. This will be true at most income levels. If income tax at low-income levels is too high, people may choose not to work but to remain on benefits for a longer period of time instead. If income tax on high levels of income is too high, people may choose not to work so hard and take risks. Ultimately they may even choose to leave the country if taxes elsewhere are much lower.
Supply-side fiscal policies could therefore include:
- Cutting the lower and basic rates of tax to open up the gap between earnings in and out of work and ensure people have an incentive to work
- Increasing the level of personal allowances for the same reason
- Reducing the top rate of tax to encourage enterprise, risk-taking and the incentive to work hard
Conclusion
Since 1975 there have been two recessions in the UK. The first one was in 1980, which was caused by the tightening of fiscal and monetary policies. This resulted in inflation rising to 18% in 1980, and GDP fell to –2.5%. Unemployment also started increasing to 6.2% in 1980 to 9.8% in 1981.
The second recession occurred in the early 1990s. This was because of the loosening of the monetary and fiscal policy, this brought inflation to 9.8% (highest since 1980), and GDP to –2.6% in 1991(lowest since 1980). Unemployment was 6% in 1990 and gradually increased. The measures that were used during these two periods were effective but took a lot out of the economy.
EC1000-Business Economics
Bibliography
Jewell, R, B (1993) ‘’The UK Economy and Europe’’ 1st Ed., Pitman Publishing
Holmes, M (1983-87) ‘’Thatcherism Scope and limits’’ 1st Ed., Macmillian
Begg, D (2001) ‘’Foundations of economics’’ 6th Ed., McGraw-Hill
Wall, S (1996) ‘’Business Economics’’ 1st Ed., Longman
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