There are a number of systems that already exist in place to address the situation of regional disparity. Firstly there are areas which have been identified as requiring financial assistance from the government known as assisted areas or AAs. These are divided into two tiers dependent on the severity of their circumstances and receive aid accordingly. This aid comes in the form of regional selective assistance or RSA which offers grants of up to 40% to firms (depending on which tier you fall into) for investment projects providing skilled jobs. A third tier is established for small and medium-sized firms employing up to 250 people, these receive money through regional enterprise grant or REGs.
As the UK economy briefing document states financial assistance also comes from outside the UK and in fact John Sloman tells us that “the largest amount of regional assistance comes from the European Regional Development Fund”. The money offered by the ERDF is only for use in the identified AAs and should only be in addition to any money given to those areas by the government but in the UK as in other countries this has in some cases been used to replace government assistance. The ERDF particularly focuses on:
- Investment to create and maintain employment
- Investment in infrastructure
- Investments in education and health
- Measures to enhance research and development
- Collective measures to support economic activity
The UK government has also set up eight Regional Development Agencies which are responsible for administering economic policies and developing strategies for improving local infrastructure, promoting investment in skills and training and encouraging inward investment.
The government can use fiscal policy to change disposable income and purchasing power. Keynesian or demand-management policies would be used to increase demand for goods/services and subsequently jobs would be created by the multiplier effect – as demand increases more people are taken on to meet that demand, as those people have a higher disposable income demand for more goods/services increases and so on.
Monetary policy can be used to control government spending, the supply of money and changes in interest rates – for example if interest rates are lower then the cost of borrowing decreases, this in turn encourages new borrowing and frees-up money for those with existing debts; with a greater disposable income the demand for goods/services increases and this creates more jobs. From the point of view of firms lower interest rates means more money for investment which can also lead to more jobs and better training opportunities.
Supply-side policies are associated with Conservative policies in the UK and work to make employing workers seem more attractive using a number of tactics such as reforming trade unions and reducing their powers, opposing minimum wage, increasing government sponsored training schemes. In the past welfare and unemployment benefits were changed to make work seem more attractive and legal changes made hiring and firing easier and cheaper effectively reducing the fear of taking on the wrong people and getting ‘stuck’ with them or facing large costs to replace them. These policies work for the side of the firm to encourage the intake of new workers.
(c) Income inequality
According to a report by the Joseph Rowntree Foundation income differentials increased substantially during the 1980s due to a number of factors which included:
- The gap between high and low pay grew rapidly, partly linked to increasing premiums for skills and qualifications, in turn linked to technological change.
- There was a decline in the importance of unions and minimum wage protection.
- The number of workless households rose faster than the overall official unemployment rates.
- Price-linking of benefits after the early 1980s caused those remaining on benefits to fall behind the rest of the population as overall incomes rose.
(taken from Economics, Alain Anderton – see bibliography)
Another inquiry also by the Rowntree Foundation noted that globally “the UK was second only to New Zealand in the speed in which inequality had increased” from 1979-92. This report attempted to identify solutions to the problem and some of these specifically related to income included:
- Targeting tax cuts at the poor and not the rich
- Top-up benefits for those on low incomes
- Restoration of free school meals for those on Family Credit
As John Sloman tells us by taxing the rich proportionately more than the poor, the post-tax distribution of income will be more equal than the pre-tax distribution; this is known as progressive tax where the percentage of tax on income that is paid rises as the income rises. Cash benefit subsidiaries to people’s income such as family credit and child benefit, and benefits in kind such as free or subsidised health care, dentistry and education help to lessen the inequality so long as they account for a larger proportion of a poor person’s income than a rich person’s. Legislation such as minimum wage and anti-discrimination laws (same work for the same pay) also act to improve income inequality.
Inflation too can affect the distribution of income but it affects different groups of people in different ways. Wages for example generally rise above the rate of inflation but there are people whose income rates are fixed or rise by less than the rate of inflation so we see a winner and a loser scenario.
Some other targeted policies that the government might introduce to tackle the problem with income inequality could include forcing firms to provide sickness benefits, pensions and medical care to its employees. Sponsored training schemes to raise the level of skill in workers leading to increased income would also be an option.
(d) Stirling and the Balance of Payments
In an article in The Observer this month (Sunday 11th May, see appendix C), Michael Hume talks about “Brown’s sterling gamble”. A leading city economist is said to believe that a ‘no’ to the euro could be followed by a full-scale sterling crisis. With the assessment of the five economic tests for the euro entry approaching many people are sitting on the edge of their seats with fears about the outcome. Mr. Hume believes that it is a foregone conclusion and that the Treasury will announce that the tests have failed and Britain will not be part of the euro for at least a further four years.
A similar article on Monday 12th May by Mark Tran of the Guardian “Don’t close door on euro, say business chiefs” (see appendix D) highlights a strong division in the business community over the euro debate; while one group talks of the evidence suggesting “that the conditions for entry are right” and that “commercial reality strongly dictates that the risks of staying outside the euro far outweigh any risks of joining”, another group argues that “Britain has half the rate of unemployment of the eurozone”, “growth is running about double that of the eurozone” and that “we’ve done well by keeping control over our own interest rates and the evidence speaks for itself”.
For a number of years now manufacturers have pointed to the strength of the pound against the euro as their downfall, recent media suggests however that the pound is weakening against the euro and questions are being asked; will this turn the tide for UK manufacturing? Or if Britain joins the euro, will all its troubles be over?
It is certainly a serious issue and one that must be mentioned under this heading. The value of the pound against the euro is a vitally significant factor affecting exchange rates. One economic reporter, Anatole Kaletsky of The Times, tells us in a report on the 14th of this month (May 2003, see appendix E) that “Britain’s cost structure is now competitive in international terms. At the present exchange rate, UK manufacturing labour costs are the same as Italy’s, 10 per cent below the French and US levels and 40 per cent lower than they are in Germany.” This perhaps indicates that previous fears of a worsening situation with the current account are less frightening than previously thought. As would always seem to be the case with economic situations, however, Anatole’s enthusiasm is not shared by all and circumstances would seem to don a new face almost as often as the changing of the days.
John Sloman (see bibliography) suggests that in a boom a government is most likely to be concerned with inflation and the balance of payments and subsequently it will adopt policies which are deflationary such as have already been discussed – deflationary fiscal and monetary policies.
2. (a) Inflation
Broadside’s major product is beer and as the case study outlines it is very susceptible to changes in the economy. The market research revealed that a large proportion of beer is sold to the low income socio-economic groups C and D and these groups are also vulnerable to changes in the economy; if inflation continued to rise then the prices of beer would go up leaving a large proportion of Broadside’s customer base for this product feeling that they could no longer afford to spend the same amount on beer as they had done previously. Effectively this would mean a drop in sales and a subsequent drop in profits. It might be wise in the short-term to consider how much of the burden of inflation the company could bear before it was necessary to pass some of it on to its customers and to try and judge just how much those customers are likely to be able and willing to afford before demand falls significantly.
Modest inflation of around 2-3% can be good for a profitable business such as Broadside and inflation also reduces the value of debt – good news when you are highly geared. If UK inflation is higher than other countries, however, then this will impact upon exports as other countries would be more competitive.
Broadside’s own concerns surrounding the cost of labour could also have an internal cost-push inflationary effect if costs reached levels requiring prices to rise, forcing the burden onto customers – this would likely erode profit margins.
If the government were to use fiscal policy to tackle the problem with inflation, increasing direct taxes, this could affect Broadside in two ways. Firstly the burden of increased taxes on the customer would lower disposable incomes and as we have already discussed this would affect a large proportion of the company’s customer base which would impact upon sales and therefore profit margins. Broadside might have to look at ways of tackling this such as lowering prices to try and boost demand. Increased direct taxes, however, also affect firms through corporation tax pushing up costs. If you cannot deal with this by increasing prices, and it is unlikely that a happy medium would be found in the price level, then other solutions must be found such as examining staffing levels with a view to streamlining. An increase in costs also has implications on the availability of finance for investments which could cause particular problems considering the looming necessary upgrade of the bottling plant.
Monetary policy, increasing interest rates should ring alarm bells for a highly geared company such as Broadside. Current indications are that there is little concern for the company’s gearing level but would this remain true if interest rates were to rise? This would subsequently increase the cost of its borrowing; as well as the bank loan there is also the overdraft to consider which is currently at its limit. Increased interest rates obviously affect the customer too; lower disposable income means a drop in demand.
(b) Regional disparity
Although it is based in the North I am not aware that Broadside brewery falls into one of the areas known as AAs (assisted areas). These areas are divided into two tiers; the first tier is classed as suffering the most acute economic problems and covers Cornwall, South Yorkshire, Merseyside and much of Wales. Tier two’s areas affected by economic decline include large parts of Scotland and the north-east of England as well as many smaller areas – it is possible that the small East Anglian town in which the brewery operates does fall into one of these ‘smaller areas’, I do not have specific information but as the briefing document outlines regional decay and the decline of staple industries this would seem plausible. If Broadside does fall into tier two then it may be eligible for a grant of up to 20% of investment costs for any investment projects that would provide skilled jobs through regional selective assistance (RSA). What should be in addition to this is a grant from the European Regional Development Fund (ERDF) of up to 50% but as previously mentioned this might simply be the only grant if the attitude of the government is that it replaces any assistance from them.
If Broadside’s town does not fall into one of these areas then it might still be possible to approach the relevant Regional Development Agency for some financial assistance. Any of these funds have the potential to aid Broadside and its local community through what is known as the multiplier effect. The brewery owns pubs in its immediate area in which it sells its products and so if it were to create jobs within that area this would boost the local economy, increase disposable income, which would in turn increase demand for its products and other products in the area leading to the creation of more jobs to meet that demand, more people with disposable income and so on.
(c) Income inequality
One significant issue that could cause concern for Broadside here would be the potential for a rise in the minimum wage. Alain Anderton, for example, describes how members of a private think tank came up with ways to reduce poverty in the UK; one of these ways was to raise the minimum wage to £6.00 an hour! Economic theory suggests that if firms are forced to pay higher wages then they will hire fewer staff – Broadside could once again be looking at streamlining its operations.
In addition to this there might also be further cost implications if, as mentioned in section 1, the government were to force such policies as the provision of sickness benefits, pensions and medical care. All of these policies indicate increased costs to the firm which would have to be addressed somehow; this would either have to be through the reduction of staffing levels, a drive to increase sales such as investment in advertising (which obviously carries its own significant cost implications), or increasing prices. One option could be to target the price increases of goods at the products which are sold in markets that, by their own nature, can bear the increase while still sustaining demand. The luxury hotels for example are aimed at an upmarket clientele which is less affected by price changes than the current clientele for beer.
One positive policy which Broadside could use to its advantage is the potential for government expenditure on sponsored training schemes. The brewery might quality for government assistance with the retraining that is going to be required within the next decade as many of its current employees retire.
(d) Stirling and the balance of payments.
A memo taken from the Cambridge 2000 website (see bibliography and appendix F) which compares Sterling against four other major currencies around the world – namely Japanese yen, Swiss franc, US dollar and German mark – in the ‘effective exchange rate’ over the period 1975-2001, tells us that “the only currency amongst the five which was lower at the end of 2001 than at the beginning of 1975 is sterling”. Quite rightly on this basis the memo asks “Is this an ‘overvalued’ currency?”
It could be argued for Broadside that entering into the euro would be beneficial considering its current levels of imports and exports within Europe, and the potential for further expansion with new sales of the ‘Havel’ brand, but as we have seen the arguments are wide and varied on both sides – there is almost certainly an information overload surrounding this issue making it very difficult for even the wisest of experts to come up with the best recommendation. For example according to another report taken from the Bank of England website (see bibliography) joining the euro had few implications for effective exchange rates for the eleven countries that joined in January 1999. “Data for the eleven currencies continues to be published using the existing trade weights and by converting the current euro exchange rate to that of the legacy currency exchange rate using the fixed conversion values as defined on the 31st December 1998”.
If the balance of payments is in deficit for the UK then this can have a number of effects. Either the rate of exchange would have to adjust until they were equal lowering the UK’s ability to be competitive with overseas trade (a catch 22 scenario). Deficit would have to be covered by borrowing foreign currency from abroad or eating into the UK’s reserves, this could lead to a need to pay high rates of interest and even cause a crisis of confidence leading to a run on the pound.
As discussed in section 1(d) the government might intervene in the situation of the balance of payment and the value of sterling using deflationary policies to ‘curtail’ aggregate demand. These policies would be either fiscal (raising taxes and/or reducing government expenditure) or monetary policy (reducing the supply of money and raising interest rates). As outlined by John Sloman a reduction in aggregate demand will work in two ways:
- A reduction in the level of consumer spending cutting imports. Supply of sterling coming on to the UK market thus decreases
- A reduction in the rate of inflation making UK goods more competitive abroad, subsequently increasing demand for sterling. There will also be a cut back in imports rising from UK consumers switching to now more competitive home-produced goods. The supply of sterling falls.
If this were the case Broadside could benefit from this through increased sales both in this country and abroad and could use the opportunity to invest money back into the company.
