UK interest rates and government spending
- cut from 4.75% to 4.5%
Increased under labour gov:
- £22.6 billion in the NHS over next two years, over £100 billion on infrastructure
- capital investment to rise by £14.7 billion between 2024/25 and 2025/26
Labour taxation plans and Conservatives Economic Record
Labour taxation plans:
- rate of employers NICs rise to 15%
- capital gains tax rise from 10 to 18% and higher rate from 20 to 24%
- extra rate of stamp duty on additional homes will rise from 3 to 5%
- VAT on private school fees
Conservative Economic Record:
- UK economy generally grown under tory gov but rate slowed in recent years
- unemployment generally fallen (apart from rise during COVID) fell from 5.2% in 2010 to 3.8% in 2019
- gov debt increased significantly, now above 90% of national income
- Brexit has had significant negative impact on UK economy: 3 million fewer jobs, 32% lower investment
UK economic growth
- relatively steady at around 3-4% increase
- external shock of COVID caused fall in GDP of about -7.7%, not seen since WW2
- Russia-Ukraine war resulted in inflation reaching high of 10.1%
Globalisation and the UK economy
- Growth and Jobs: economy benefits from trade with industries like manufacturing/services contributing over £665 billion to GDP in 2021, supporting 32.4 million jobs
- Choice and lower prices for consumers: increased trade competition = reduced prices, saving households £150 annually
- business growth and export opportunities: uk export reached £813 billion in 2022, small business contributing 10% of this
- reduced absolute poverty: helped to reduce absolute poverty
UK trade deals
- Australia-UK Free trade agreement: Australia send certain amount of agricultural goods per year to the UK with no tariffs. Over time, quotas will increase, after 15 years, there will be no quotas or tariffs on agricultural produce, apart from long-grain rice
EV:
- lead to death of UK farms due to unable to compete
- increase the size of the British economy by only about 0.02%, over 15 years
- if australia offered generous terms other countries may also want the same
UK pattern of trade
Comparative advantage:
- pharmaceuticals e.g (GSK) and AstraZeneca: use of university (Oxford) for research
- cars: particularly luxury ones: e.g Rolls Royce, Bentley, Aston Martin etc
- commonwealth: 9% including India, Australia
- largest trading country is USA = 21% of exports
- EU still largest trading partner despite Brexit: exports fell by 14% in year following brexit
Protectionism in the US
- 2018, steel and aluminium tariffs (25% on steel and 10% on aluminium) designed to protect American manufacturers, especially against overproduction from countries like China
- US long faced trade deficit with China - $375 billion in 2017, so tariffs used to “bring back American jobs”
- following tariffs, 1,000 jobs were added in steel production
- e.g US imposed tariffs on solar panels from China in 2018, citing concerns Chinese manufacturers were receiving subsidies which made their products unfairly cheap - started at 30%
Exchange rate in the UK
- since Nov 2022, overrall appreciation in value of pound in comparison to both dollar and the euro
- however, value of pound to the dollar is still relatively low compared to historically due to record dip which was experienced after announcement of mini budget in September 2022
- announcement of mini-budget caused significant uncertainty in UK economy which would likely cause investors to sell pounds and reinvest in other currencies
- after reversal of mini budget and replacement of Liz truss, investors likely saw this as low point in exchange rate and reinvested in £ believing it would appreciate after this low point
UK current account deficit
- historically high at 8.3% current account deficit in UK
reasons for: - manufacturing decline: reliance on imports/falling export market
- brexit and trade barriers: tariffs on UK increased costs for exporters/reduced competitiveness
- exchange rates: weaker pound = increases cost of imports
- energy dependence: UK imports large share of energy
UK competitiveness
UK car industry:
- contributes 10% of UK goods exports in 2023
Factors contributing to competitiveness:
- Productivity: UK productivity in 2023 around 17% lower than G7 average due to underinvestment, slow R&D into new schemes and regional disparities
- Labour costs: despite higher labour costs on average, can be an advantage if firms are getting a higher quality production and more innovation/ideas
- can give them a comparative advantage and make them more competitive
- Regional infrastructure: networking logistic routes
- Investment:
- ability to attract high levels of investment boosts competitiveness but post brexit declined due to decreasing trade/uncertainty
- another factor making UK more competitive is gov schemes e.g Automotive transformation fund which aims to attract investment in EV production
- Energy costs: very high due to EU competitiveness, they significantly rose following Ukraine-Russia war, increases cost of production
- Trade and market access: increased cost of exports
- Workforce: skilled workforce but shortages in the EV assembly, software engineering and automation roles
Reasons why UK dont want to join Monetary union
- five economic tests for joining the Euro were not met
- slower growth and jobs: cannot devalue their currency to overcome this
- problem of supporting struggling economies: UK likely have to pay large financial sums to support peripheral countries in debt
- may cause further future problems, as gov will be forced to raise taxes, reducing standard of living/disposable income for UK citizen
Reasons for Croatia joining Monetary union
- adopted euro as its currency on 1st January 2023
a) Increase economic growth: - increased cross border trade and reduce transaction costs
b) boost FDI in croatia: - multinational companies will want to benefit from greater ease of trade available with EU
c) reduce inflation: - greater specialisation and competition between firms in EU should lead to greater efficiency and so lower production costs and so lower cost-push inflation
Cost:
- inability to devalue the currency and so exchange rate cannot fall to improve competitiveness of their exports
Globalisation in China
Benefits:
- international trade:
- largest exporter in the world: accounting for about 14.4% as of 2023 in exports
- FDI: seen considerable FDI, in year 2022, got nearly US$189 billion in FDI - largest int he world
- Economic growth: since opening up to international trade/investment in late 1970s, China’s GDP has grown at an average annual rate of about 9-10%
- job creation and poverty reduction: helped lift hundreds of millions out of poverty
- between 1981 and 2015 pulled more than 800 million out of poverty
Costs:
- environmental impact: 28% of CO2 emissions in 2023
- income inequality: dividing gap has gone on widening
- loss of industries: while China gradually shifting more to service-orientated and technology-based economic prospects, many workers struggle to adapt in traditional sectors
US responses to Great Depression
Fiscal:
- roosevelt’s new deal: gov spending (expansionary)
- increased protectionism to increase domestic production/consumption
Monetary:
- cut interest rates from 6 to 4% but then raised them again same year
- contractionary policy that further weakened the flow of money
UK Great Depression responses
Fiscal:
- prioritised balanced budget with contractionary policies
- cut public sector wages and unemployment benefits by 10%
- raised income tax and introduced 10% tariff on all imports
Monetary:
- stopped gold standard causing depreciation: higher exports/AD
- bank rate lowered from 6% to 2% - AD increase
US Financial crisis responses
Fiscal:
- expansionary
- banks not allowed to fail/supported by the gov
- economic stimulus act - money injected in
Monetary:
- federal reserve cut bank rates 8x and three rounds of QE
UK financial crisis response
Fiscal:
- expansionary: banks not allowed to fail
- income tax cuts, VAT 2.5% reduction, small business loan guarantee scheme
- £3 bn investment on infrastructure by gov
Monetary:
- BofE cut Bank rate 9x and several rounds of QE
