What Has Happened to the Economy of the United Kingdom over the Last Two Years - Case Study Example

ECONOMY OF UNITED KINGDOM Name Institution Course Tutor Date Economy of United Kingdom The United Kingdom economy is ranked number five of the global largest national economy as per gross domestic product (GDP) measurement and ranked number nine as per purchasing power parity (PPP) and it comprises of the world 4% GDP. Consequentially, the UK economy is the second largest economy as per the European Union both GDP and PPP metrics. According to the recent research over the last two years in 2015, the UK refers to ninth largest exporter ninth-largest exporter and sixth-largest importer and the second regarding outward and inward direct investment (Bogdanor, 2015). Essentially, UK is regarded among the significantly globalized economies, and it composes of four countries namely Northern Ireland, Wales, Scotland, and England. Over the last two years, the UK economy is driven by service sector which accounts for 78% of GDP primarily the financial services that are fundamental in the UK economy and is regarded as the world significant financial centre and the aerospace industry is ranked second and the pharmaceutical industry is ranked number three. Describe and evaluate the first macroeconomic policies used by the Government and Central Bank of UK over the last two years. Over the two-year period that is from the year 2014, the UK economy has been managed using laissez-faire approach where the Bank of England is primarily the UK central bank that embraces the monetary policy that is responsible for setting the quantitative easing, interest rates, and forward guidance. The UK government has utilized the central bank in the last two years in management of the nation economy (Emily and Chris, 2016). This is undertaken through two significant responsibilities that are supporting the government in maintaining financial stability and macroeconomic stability. Ostensibly, the central banks utilize monetary policy in trying to achieve the country macroeconomic stability through recognition of lender-of-last-resort function aimed at financial stability achievement. The central bank uses three primary policy instruments such as supply-side policies, fiscal policies, and monetary policy. Supply-side policies This refers to a monetary policy that result in improvement of productive economy potential and its production ability (Bogdanor, 2015). The United Kingdom has utilized several individual government actions that help in the improvement of supply-side performance. The central bank of UK has utilized several production factors that have helped the country to bounce back from the recent economic recession. The tax system: The country has introduced a tax system that offers incentives in helping and stimulation of output factors instead of altering the demand, which is regarded as the central, or the heart of supply-side policy (Bhatia, 2016). Ostensibly, this procedure entails a reduction of direct tax rates that includes corporation and income tax. Reduced income tax is incentives for unemployed employees that are joining the labor market. Reduced business tax results to the provision of incentives for technocrat and entrepreneur and increased national output. The supply-side policies also include the labor market promotion and competition. Consequentially, the policy helps in reduction labor market rigidities and restrictive practices for example employment protection. The supply-side reforms within the entire UK result in powers of a trade union that significantly reduces a series of measurements that limits the worker's ability to engage in demonstration and strikes. This policy also helps in improvement of labor mobility that positively affects the supply-side and labor productivity. The policies have also helped the economy by improving the mobility, flexibility, and skills (Emily and Chris, 2016). This process is referred to as human capital development, which involves investing in training, and education that facilitates labor productivity improvement. The UK government has engaged in spending money directly and provision of private suppliers incentives that simplifies the market entry through public expenditure on set standards that helps in mitigation of economic dynamics. The UK government also encourages local bargaining that the central bargaining pay (Bogdanor, 2015). Ostensibly, this policy helps in reduction of labor mobility that helps in setting equilibrium to mitigate the surpluses by creating a standard national pay rates as the presence of different rates distorts the labor demand in the economy. Fiscal policies This refers to government adjustments in the tax rates and spending levels to influence and monitor the nation’s economy impact. This relates to an economy management that mirrors the monetary policy that uses the central bank in controlling the country money supply. Therefore, the UK has utilized two policies that are the monitor and fiscal policy concurrently that is directed towards the resuscitation of the UK economic goals. The procedures also use the Keynesian economics that involves the moderation of macroeconomic levels of productivity by decreasing and increasing the public spending and tax levels (Simon, 2016). Consequentially, this effect influences the curbing of inflation that emphasizes on maintenance of the value of money and increased employment. Therefore, the fiscal policy is significant in any country economy for instance over the last two years the Monetary policy Primarily, it consists of the supervisory committee, currency board, and central bank determining the growth rate and size of the money supply that consequentially affects the economy interest rates (Bogdanor, 2015). Therefore, the monetary policy should be maintained through some significant premeditated actions for example interest rates modification, selling, buying of government bonds, and changing of the monetary value. The UK central bank uses different types of policy namely contradictionary, expansionary, and monetary policy. Consequentially, the expansionary monetary policy results in the increasing of the money supply with the aim of reducing the unemployment, boosting borrowing of a private sector, economic growth stimulation, and consumer spending (Emily and Chris, 2016). Contractionary monetary policy inhibits the money supply growth that results in the outright decrease of the money supply that controls inflation that results in slowing of economic growth, depressing borrowing, and business and consumers spending. The UK central bank utilizes some monetary policies such as fed funds rate, LIBOR, and open market operation. The open market operation (OMO) is financial tools used by the central bank in regulating the money supply using the short-term government bonds. Interest rates benchmark such as Fed funds rate and LIBOR affecting the money demand through lowering and raising the cost of borrowing. The monetary policy that is responsible for setting economic back on track is the quantitative easing, interest rates, and forward guidance. Quantitative easing: Primarily, quantitative easing (QE) refers to unconventional and traditional monetary policy whereby the central bank purchases the corporate and government securities with the aim of reducing the interest rates and increasing money supply. Therefore, the QE results in money supply increase through financial institutions flooding that are geared towards the promotion of greater liquidity and lending (Emily and Chris, 2016). The QE is regarded as liable when short-run interests rates tend to approach zero. Over the last two years, the UK central bank has utilized quantitative easing to shore up and boost lending. Ostensibly, the UK has used the QE in mitigating the recent recession by shrinking the unemployment rate to 6.03%. However, the UK Brexit decision has greatly affected the UK currency depreciation that significantly dropped to break a 31 years record against the US dollar that translates to the sharp reduction in consumer confidence. Hence, one month after the historic voter, the report by purchasing managers index report indicate that it caused a dramatic economic deterioration with order and output falling to the lowest level since the great rescission. As a result, the central bank or the Bank of England has responded to Brexit implication by reducing the interest rates to 0.25% from the 0.5%. Therefore, the Bank of England bought $10 billion corporate bonds and $60 billion UK government bonds hence since reverting of the UK economy from great recession (Bahmani Oskooee, 1991). The UK has used approximately $435 billion in the quantitative easing monetary policy approach. Forward guidance: Primarily, this refers to the application of monetary policies by the central bank that influences the investors, businesses, and households by giving a hint of future expected interest rate fluctuation. Ostensibly, the central bank tends to put mitigate measures against the market surprises that tends to disrupt the asset prices (Emily and Chris, 2016). The forward guidance is the vital tool for UK central bank through the bank of England. The UK has primarily used the forward guidance as an important strategy to bounce back economically after the great recession. Utilization of this approach has helped the UK economy to maintain relatively low-interest rates that help in the improvement of credit availability and economy stimulation. The use of FOMC has yielded some fruits for instance in 2014. The forward guidance helped in keeping the federal fund rates at a minimum level with the aim of reducing the unemployment rate to below 6.5% and to increase the inflation to 2% annually (Bogdanor, 2015). Moreover, the approach has is crucial in real estate industry because of the implication of the mortgage interest rate. How successful has the Government and the Central Bank of UK in running its economy over the last two years? Reduction of debt to GDP ratio The country has experienced economic expansion over the last two years, which has resulted in improvement of tax revenues and reduction of spending benefits such as a job-seekers allowance. Ostensibly, the economic slowdown experienced in the UK since 2010 has almost tripled to a dip recession and hence further squeezing the tax revenues leading to target deficit reduction (Bahmani Oskooee, 1991). The UK government has embraced an economic stabilization strategy through the cutting of public expenditure and tax increase through the use of taxation such as VAT with the aim of improvement of public finance and hence facilitate dealing with the structural deficit (Bogdanor, 2015). The complexity that the central bank experiences are the extent of the spending cuts aimed at reduction of economic growth and hampering attempts in improving tax revenues. Ostensibly, some economist argues that the timing of consolidation deficit is crucial and its growth should precede the fiscal consolidation. Within the last two years, the country has reported an increase in the national debt because of the inclusion of private finance and pension contribution and PFI initiatives that are part of the federal government obligation (Bhatia, 2016). However, the pension liabilities currently the government has since ceased their spending on them hence no need the government to continue borrowing for them. However, the government through the central bank has added finance of $500 billion aimed at funding potential liabilities through the government offering of mortgage securities (Simon, 2016).The UK central bank mitigates and manages this additional national debt through the use of federal debt contingent liability that represents over 100% GDP. Ostensibly, the CBK intends to achieve this through bank sector improvement where the banking sector will deal with the bailouts necessity unless emerging sharp global financial markets deterioration arises. The CBK intends to manage the government debt through some strategic economic management strategies such as increasing taxation aimed at reducing future spending. The other strategy is crowding out of public expenditure and private sector investment. Ostensibly, the structural deficit worsens depending on increasing aging population that strains the United Kingdom pension liabilities (Bhatia, 2016). Consequentially, the CBK also tend to utilize the increasing potential of interest rates that results in the market reluctance of lending to the UK government. Other debt management measures that the CBK has embraced is zero interest rates and liquidity trap that helps the government in borrowing at a reduced interest rates over’s. Conclusion In conclusion, the United Kingdom economy is ranked among the largest national economy as per gross domestic product (GDP) measurement and purchasing power parity (PPP), and it comprises of the world 4% GDP. The UK government has embraced an economic stabilization strategy through the cutting of government spending and tax increase through the use of taxation such as VAT with the aim of improvement of public finance and hence facilitate dealing with the structural deficit. The monetary policy that is responsible for setting economic back on track is the quantitative easing, interest rates, and forward guidance. The central bank uses three major policy instruments such as supply-side policies, fiscal policies, and monetary policy. Over the last two-year period, the UK economy has been managed using laissez-faire approach where the Bank of England is primarily the UK central bank that embraces the monetary policy that is responsible for setting the quantitative easing, interest rates, and forward guidance. References Bahmani Oskooee, M. (1991). The demand for money in an open economy: The United Kingdom: Applied Economics, 23(6), 1037-1042. Bhatia, K. L. 2016. International economics New Delhi: Vikas Publishing House Pvt. Ltd.  Emily C and Chris G. 2016. "UK economy at a glance" Financial Times Retrieved 30th October 2016 From https://ig.ft.com/sites/numbers/economies/uk Simon, R. 2016. "Is the UK facing a debt disaster?". Independent. Retrieved 30 October 2016 from http://www.independent.co.uk/money/is-britain-facing-a-debt-disaster-a6808086.html Bogdanor, V. 2015. Devolution in the United Kingdom Oxford [u.a.], Oxford Univ. Press Read More