Work: UK Economic Performance
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Evaluate the UK’s economic performance in recent decades from both an historical and international perspective
Introduction
The discussion will examine unemployment, inflation and interest rates, economic growth and the UK’s Balance of Payments. Despite recent success in the service sector, arguably, Britain has been less successful in manufacturing with its share of national output down from 26% in 1979, to 10.8 in 2011[1]. Also, manufacturing employment has fallen from 6.7 million jobs in 1979 to 2.6 million jobs in 2013[2].
Unemployment
One of the main strategies to reduce unemployment has been ‘supply side policies’. Benefits have been cut “so that an unemployed man who takes a job will be better off working than he would have been before”[3]. The minimum wage has now been improved, to £6.31 an hour[4], to encourage unemployed people into work. It would appear that such policies are working. Unemployment was 2.5 million at the start of 2013[5]. This is officially lower than 1984 when it was over 3 million[6].
However, the economy’s performance can be questioned. Economic inactivity suggests that the weakness of the UK economy is more serious than the unemployment figures suggest. “In 2002, only 72 per cent of men over the age of 50 were still in work”[7]. Also, many people are on a low income and have been reliant on in-work benefits to supplement their income[8]. This can be seen by the 2.7 million people, in 2007, who earned under £7,500[9]. Another concern, regarding employment prospects, is the relatively low level of people in the UK workforce, with no vocational qualifications “as compared with France and Germany”[10].
Inflation and Interest Rates
The UK has performed poorly in terms of inflation which peaked at nearly 27% in 1975[11]. Arguably, a high level of inflation would have occurred even without the oil price shock. This was because, before 1975, aggregate demand was excessive due to a growth in the money supply from more relaxed bank lending. Aggregate demand was beyond the full employment level of output.
Interest rates fell to 9% in 1982[12], and there was a benign inflationary environment in the early 1980’s[13]. However, this success was offset by insufficient aggregate demand evidenced by the 3 million unemployed. The increase in inflation, in the late 1980’s, cannot be regarded as an achievement. This is because it is argued that looser monetary and fiscal policy, with tax cutting budgets, led to aggregate demand moving “beyond the full employment level”[14]. The high interest rates of the late 1980’s[15] cannot be regarded as a success as they were perhaps a reflection of the instability in the economy[16]. Arguably, the introduction of the Monetary Policy Committee (MPC) has helped improve the performance of the UK economy as monetary policy “is not adding to the volatility of the economy in a way that it did in earlier decades”[17].
Economic Growth
Economic growth improved in the 1980’s but not to the extent of “the post war decades”[18]. The Japanese economy has also struggled, compared to previous decades. However, it had economic growth of 9.6% in the 1960’s[19]. Perhaps, UK policy-makers have not placed sufficient emphasis on economic growth. The MPC was criticised, between 1997 and 2003, for not setting a growth target “alongside the 2.5% inflation target”[20]. Since 2010, policymakers may counter the suggestion that growth has not been high enough. They could argue that economic growth had to be balanced against other objectives such as national debt reduction.
In 2007, it was stated that Britain has generally “enjoyed rising living standards” with people comparing themselves favourably to previous generations[21]. This analysis looks outdated now. The current economic performance is particularly poor in terms of changes in Gross Domestic Product (GDP). The British economy is smaller now than it was in 2008. The economic recovery between 2008 and April 2013 is worse than previous recessions in recent decades. There was a more rapid recovery in the following periods: 1973-1976, 1979-1983 and 1990-1993[22]. The National Institute for Economic and Social Research (NIESR) does not “expect output to pass its peak”, based on early 2008, until 2014[23].
In comparison, the performance of the German economy appears to be much stronger. “The Organization for Economic Cooperation and Development (OECD) sees Germany (at) the forefront of a global economic recovery next to Japan and the US”[24]. In contrast, the NIESR describes economic growth in Britain as flat[25]. Britain’s recent economic performance is closer to that of France. “The French economy ... was set to contract by a further 0.2 percent in the first quarter (of 2013), after shrinking 0.3 percent at the end of 2012”[26]. One of the reasons why German growth is stronger than that in Britain is because of the strength of its manufacturing industry. This will be discussed in the next section.
Balance of payments / Current Account Balance
In the late 1970’s North Sea Oil helped improve the performance of the UK economy on the Current Account[27]. However, the economy has performed less well in terms of manufacturing industry. “The UK share of manufacturing fell from 17% in 1960, to 7.5% by 1984 before falling to a new low of 5% in 2004. The significant fall in manufactures was not matched by any of the main competitors”[28]. The UK’s performance has been particularly weak in terms of import penetration. “By the 1990s the average level of import penetration was significantly higher, in the UK, than in the other (European) countries”[29]. In other words, the import of manufactured goods, say from Germany, outweighed exports from Britain into Germany. “The UK has surpluses on services but there is no guarantee that such surpluses will grow fast enough to compensate for the deterioration in exports of manufactures”[30].
Conclusion
An assessment of the UK’s economic performance needs to be seen in the context of a satisficing theory of economic policy. Often it is not possible to achieve the best possible performance in all areas of macroeconomics. Instead policymakers frequently aim to achieve a satisfactory level of performance[31] amongst a range of objectives. Decision-makers often have to balance different aims such as the need for economic growth, and employment, versus the need to reduce the national debt.
References
[1] Groom, B. , Manufacturers remain divided over legacy of Thatcher policies, Financial Times, p. 2, 13/04/13
[2] Ibid
[3] Minford, P. , The Supply Side Revolution in Britain, Edward Elgar, Institute of Economic Affairs, Aldershot, 1991, pp. 97
[4] Groom, B., Minimum wage rises to £6.31 an hour, Financial Times
[5] Office of National Statistics, Unemployment Rate to January 2013, available at, , accessed at 15/04/13
[6] Office of National Statistics, UK unemployment falls by 37,000
[7] Harrington R. in Sawyer M. editor, The UK Economy, Sixteenth Edition, Oxford University Press, Oxford, 2005, pp.6
[8] Stacey, K. and Parker G., Squeeze on tax credits to pay for £1bn jobs fund, Financial Times
[9] Begg, D. , Foundations of Economics, Mc-Graw Hill Education, Maidenhead, 2009, pp. 145
[10] Griffiths, A. and Wall S., Applied Economics, Eleventh Edition, Prentice Hall, Harlow, 2007, pp. 495
[11] Ibid, p. 450
[12] Ibid p. 488
[13] Bank of England, UK Inflation 1790-2005
[14] Griffiths, A. and Wall S., op. cit. , p. 452
[15] Bank of England, Statistical Interactive Database - official Bank Rate history
[16] Griffiths, A. and Wall S., op. cit. , p. 453
[17] Ibid p. 453
[18] Harrington R. in Sawyer M. editor, op. cit, p. 4
[19] Ibid
[20] Griffiths, A. and Wall S., op. cit, pp. 477
[21] Ibid
[22] National Institute of Economic and Social Research Estimates of MonthlyGDP
[23] Ibid
[24] Deutsche Well, OECD predicts strong rebound for German economy
[25] National Institute of Economic and Social Research, Op. Cit.
[26] Deutsche Well, Op. Cit.
[27] Ibid, p. 548
[28] Ibid, p. 551
[29] Ibid, p. 552
[30] Ibid, p. 565
[31] Ibid, p. 484