Unit 2 Macro: Policies to Drive Economic Recovery
We were looking today in AS macro at the policy options being considered as part of a strategy to drive a stronger recovery in demand, output, jobs and investment in the UK economy.
I am trying to encourage my students to put things into context as soon as possible in their longer essay-style questions. Here are some thoughts on a question on policies designed to bolster growth:
Some context remarks could include the following:
* A deep recession for the UK in 2009 and slow growth since - 2% or less since
* A state of semi-permanent recession and a persistent negative output gap (although this is hard to measure) - it may take some years for real GDP to recover the ground lost during the recession
* Unemployment rising towards 9% / 3 million and a major long-term unemployment problem not just among the young but with many other vulnerable groups and regions
* Fiscal policy options limited by stubbornly high fiscal deficit / divisions within the Coalition
* CPI Inflation remains above target (though forecast to fall sharply into 2012)
* Fiscal austerity plans now starting to bite including hundreds of thousands of jobs going in public sector
* Squeezed household incomes - falling real living standards for millions driving household spending lower in 2011 and 2012
* Weak export growth especially in crisis-ridden Euro Zone, too many UK exports going to debt-riddle, slow-growing advanced economies
* Fragile business and household sector confidence, low risk-appetite among financial officers in businesses
* Official interest rates already extremely low - not much can be done further to cut policy rates - UK interest rates held at 0.5% for three years
* And bond yields on 10 year Government debt is 2% or less (is this a sign of economic weakness and fears of price deflation/slow growth or a big opportunity for the government to tap the capital markets for debt-funded infrastructure spending?)
Options for driving growth
* Expansion of QE - the asset purchase programme is currently worth £325 billion
* Credit easing programme
* Intervention in currency markets (£ v Euro, $) to achieve a depreciation of sterling
* Infrastructure funding (targeted, regional impact, labour-intensive, capacity-building)
* Migration policy (easing caps, encouraging inward migration of talented skilled workers and entrepreneurs/students)
* Enterprise policy to encourage new business formation
* Research and Innovation incentives
* Bank nationalisation / British Business Bank
* Planning reforms (housing) to boost activity in construction
* Employment taxes e.g. Cuts in employers’ national insurance to expand employment
* Cut taxes on lower-paid jobs to boost work incentives
* Reforms to VAT (lower VAT to boost consumption, reform it to encourage property renovation etc)
* Incentives for environmental investment / low-carbon growth
* Youth training guarantees - needs to be ambitious, debate over degree of compulsion
* Fast-forwarding major capital projects e.g. Transport net
* Revising the budget deficit reduction plans (less austerity) - does repression-economics work?
Suggestions for reading
Paul Mason (BBC Newsnight): Repressionomics - can ‘financial repression’ solve debt crisis?
Matthew Taylor (RSA): Can German business ideas revive the UK economy?
Lord Browne: UK economic future ‘depends on engineers’
Guardian news: Half of UK’s young black males are unemployed (March 2012)
Larry Elliott (Guardian): A good job is hard to find for Britain’s young unemployed
Re-Thinking Economics (Mike Kitson)
This intensive one-day exam coaching & revision workshop will help improve your AS Economics students ability to maximise their performance in the 2015 exams. This workshop combines the core topics for both the microeconomics and macroeconomics papers this summer.