Unit 2 Macro: Policies to Drive Economic Recovery

Actual and Potential GDP

    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

    Monetary Policy

    * 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

    Supply-side Policies

    * 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

    Fiscal Policy

    * 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

    BBC News: Project Merlin: Bank net lending fell in 2011

    Re-Thinking Economics (Mike Kitson)











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