The UK economy - a fragile state?

 

The UK economy is in a fragile state, having barely grown by 1% in 2011 and unlikely to even achieve this weak performance in 2012. Indeed, many regions have effectively been experiencing negative growth for a few months already. As a consequence of this, unemployment is predicted to rise towards three million (over 9% of the workforce). The only really positive forecast is that inflation will fall rapidly during the year, as energy prices rise and tax increases experienced during 2011 drop out of the figures. The situation facing the UK business community and society at large, for the coming year, is therefore challenging.

To put the UK's position into historical context, figures from the National Institute for Economic and Social Research (NIESR) demonstrate that the 2008 credit crunch recession was the second deepest economic slowdown experienced in recent times, beaten only by the Great Depression of the 1930s. The worst effects were somewhat cushioned by government policy at the time, which sought to learn the lessons of the 1930s, and instead of cutting to try and maintain balanced budgets amidst economic carnage, both monetary and fiscal policy were utilised to try to soften the negative consequences. Moreover, the government socialised many of the financial losses.
As a result, the recession was shallower than it would otherwise have been and many businesses, though badly affected, managed to struggle onwards, and fewer people were laid off than in previous downturns. However, the price of this rescue package is the current large budget deficit, falling real wages and the austerity that is now evident.

The other lesson to be drawn from the NIESR data is that the UK is in danger of suffering a slower, more sluggish recovery than in previous economic cycles, which if it is not corrected quickly, will be potentially more damaging in the medium term.

Case Analysis

1. Summarize the information of the text above. What do you know about other European economies’ rates of economic growth?

2. Use the Internet or other appropriate mass media sources to estimate the economic activity in the UK’s construction and manufacturing, government spending on infrastructure.

3. How can you account for the fact that the UK government unexpectedly had to borrow money in July which is traditionally a good month for tax receipts.

4. Prepare a report on the case considering the information of your research.

 

Role Play

Situation

The UK economy is recovering so slowly because of two major factors. The first relates to the instability arising from the international economy, primarily the Eurozone. The threat here is that nations have become so indebted that default becomes possible. The second derives from the UK government's economic approach. In essence, this is based on the assumptions that:

- large budget deficits should be quickly reduced, thereby securing lower long-term interest rates in order to benefit the economy;

- the private sector is 'crowded out' by a public sector that absorbs too many resources, and therefore cutting the latter will automatically result in a compensatory private sector expansion.

However, these assumptions are problematic. Whilst deficits cannot be allowed to remain uncontrolled, imposing a hard and fast balanced budget rule is dangerous as it prevents quick reactions to economic shocks. Seeking to cut spending when the demand is weak could be fundamentally misguided.

To ignore this is to ignore the lessons learnt by policy mistakes in the 1930s.

Task: Act out a discussion among the British politicians and economists supporting either the Conservative or Labour Parties’ views on the current economic situation in the UK. Decide the following:

1. How important is the role of government in encouraging business and economic development in the UK?

2. What exactly does the UK economy need to speed up its economic growth: private sector growth or public sector reform?

 

Speaker A

You are the Chairman. You open the meeting, chair the discussion of the reasons, problems and consequences of the UK’s sluggish economic recovery. Make your guests share opinions and make conclusions about reasonable solutions.

Make use of the helpful phrases:

- I am well aware of…

- The point is we can’t wait for people to be happy with…

- Anyway it doesn’t matter. What matters is that…

- Although none of us would argue that…

- It is clear that…

You start with mentioning the fact that the UK's economy is set to contract by 0.7% this year, according to the OECD, the club of industrialised nations. You express your deep concern about it because the UK is in danger of suffering a very slow and sluggish recovery, which if it is not corrected quickly, will be potentially damaging in the medium term. The lack of clearly defined objectives remains a major reason to stop political debates between the Conservatives and Labour and find a solution to speed up the economic recovery after the 2008 credit crunch. You express the idea that both the supporters of nationalization and those of privatization must compromise in order to avoid a major argument.

 

Speaker B

Make use of the helpful phrases:

- I am quite sure that….

- The majority of the population…

- A very small percentage of…

- That may be true, but…

- My personal feeling is that…

- Well, I am calling for couple of reasons…

You represent the New British school of Economics. You are an academically-minded person and the political controversy is the least issue you bother about. You are well aware of the subject and you try to explain the economic reasons for the current state of things. You explain why economic growth is important. This issue has always been important to all governments for a number of reasons:

- The rate of growth of output in relation to the at which the population grow, will determine the rate of increase of output per capita and therefore the rate at which the standard of living improves over time.

- Strong economic growth means that the demand for goods and services will increase, offering opportunities for business to grow.

- Strong economic growth will enable governments to increase public spending on the infrastructure.

- Strong economic growth will provide for new jobs.

Among the various factors leading to growth you concentrate on rapid developments in technology, which bring about productivity gains (more output from the same resources). The latter may induce a surge in growth.

 

Speaker C

Make use of the helpful phrases:

- Could you be more specific, please and …

- I am certain of one thing, …

- And another thing,…

- Do you mean to say that …

- There is one more thing I’d like to consider.

You are a politician and the supporter of the Labour. You start with stating that Nationalisation is not just a UK phenomenon. For different reasons and in variety of ways many Western European countries have ‘taken over’ large parts of the energy, transport and communications industry. You put forward the major arguments for nationalization:

- Some goods and services would not be provided if left to the private sector. For example, many of the commuter services around London are uneconomic. Nationalization guarantees the supply of these services at fair prices.

- Typically nationalized industries are capital intensive.

- Nationalization can enable economies of scale to be achieved.

- In the case of ‘natural monopolies’ nationalization avoids the problem of wasteful duplication of resources.

You quote the Labour 2010 Manifesto:

Labour believes we should protect frontline spending on childcare, schools, the NHS and policing, and reform our public services to put people in control. You deeply believe that Labour will strengthen our society by protecting the things people value and demanding rights and responsibilities from all. To secure the recovery you lay the foundations for economic growth: reforming banks, modernizing infrastructure, and as you pay down the deficit, providing the right support to the private sector to build a diverse, high-tech industrial economy. You think that The Tories would threaten recovery with cuts this year, and fail to invest in our economic future.

Speaker D

Make use of the helpful phrases:

- At the same time, however, …

- If you permit me…

- The chart shows that…

- It is clear from the figures that..

You are an economist who expresses criticism of planned economies and the current percentage of the public centre in the UK’s economy. Public sector is now 53% of economy as record 6.09million Britons work for the state. The public sector has ballooned under Labour to make up more than half of the economy. State spending now accounts for 53.4 per cent of gross domestic product (GDP) as compared to 40 per cent when Labour came to power in 1997. Britain's public sector is now bigger than the European Union average of 50.4 per cent, according to the Organisation for Economic Co-operation and Development figures. You state that the nationalised industries had limited scope to raise capital for long term investment and modernisation because they would have to compete with other government spending departments, like education, health and defense. The result was a prolonged period of under-investment in these industries. You admit that throughout the 1980s, most UK's major State owned industries were sold off to the private sector through privatisation. The intention was that, back in the free market, these industries would become more efficient and would be able to modernise by having greater access to the capital markets. Following the banking collapse of 2009, nationalisation was put firmly back on the agenda, if only in terms of the financial system.

 

Speaker E

Make use of the helpful phrases:

- The statistics say that…

- As I see it, …

- The point is that …

- We can hardly ignore it.

You are a politician and support the Conservatives. You agree with the previous speaker and make a point that there is growing criticism that, because these industries were protected from competition, they had become increasingly inefficient. For example, if a particular nationalised industry made operating losses, the government would simply cover those loses with subsidies. Knowing that the taxpayer would come to the rescue meant that the inefficient behaviour could continue. You quote James Cameron, the Prime Minister of the UK’s government:

“A Conservative government will act now on debt to get the economy moving. We will deal with the deficit more quickly than Labour, so that mortgage rates stay lower for longer with the Conservatives." In calling for the role of the state to be scaled back, you seek to establish a philosophical divide with the Government after 13 years of public sector expansion under the Labour. Government, you say, cannot do everything. Because of the poor state of the public finances, a Tory administration would seek to do more with less.

 

Speaker A

Make use of the helpful phrases:

I see. Well, how are the things there now?

- Surely, … is not the only solution available…

- I also feel that…

- I assure you, that…

-Furthermore…

- What exactly do you mean by …?

Chairman: say that historically the UK evolved as a market economy, with the government playing a passive role, allowing the forces of supply and demand to determine what was produced and the prices charged. However, over a period of time the state has intervened to remedy deficiencies of the market economy so that today, alongside a private sector we have an important public sector. In conclusion you say the UK economy needs private sector growth and public sector reform. Close the meeting by thanking all the participants for the discussion of the problem.