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Understanding of UK Economy

Understanding of UK Economy

It is very important for any country’s government to maintain a well-balanced and growth generated economy for the betterment of the nation and their success. There are two powerful tools of the economy that can be used by the government and the Federal Reserve to focus on the betterment of the economy and direct the economic condition in the right way. They are- fiscal policy and monetary policy (Fisher, 2014). If the policies are used correctly they can provide similar results for improving the economy and stimulating economic condition or slowing it down while necessary. The importance of using the economic policy at the right time is necessary to shape the economy or save it from crisis situations such as recession or inflation. Both of the policies can play a very significant role in the economy based on the good management of the policies. It is still a burning topic of debate that which one is more effective in the long and short-run and can provide more benefits to the economy compared to others. So here the report will focus on the use and importance of the monetary and fiscal policy and also find out their effects on the UK economy and the result of their impacts.

Understanding of UK Economy

Monetary and Fiscal Policy

Monetary Policy

It is such an aspect of economic policy that basically portrays the exact situation of money regarding the flow of money, availability of money in an economy, and also displaying the fact of borrowing money whereas it is easy to borrow that money or not. There are some factors that are related in regards to monetary policy and they are inflation condition as well as the situation of the economy, employment condition as well as the situation of the economy, and also the growth of the economy (Fisher, 2014).  Moreover, the central bank of the UK is contributing well to the better use of monetary policy whereas Bank of England is trying well to keep the economy in good situation as well as steer the economy for the purpose of providing good direction.

Fiscal Policy

Fiscal policy is used by the federal government whereas factors like government spending and taxation are the most concerning areas for the federal government. For the purpose of steering the condition of the economy in response to directing the right way. In that case, the right direction is possible if there has a function of increasing as well as decreasing the demand, even if it is possible to increase or decrease the availability of goods and services (George Leland Bach, 2011). To encourage the investor for making investment, fiscal policy plays a good role because the investor becomes interested to invest in the UK, then it will expand the job market that will create jobs in the market. Moreover, fiscal policy is directed for the growth of the long-term economy. There are some other facts like investment decision, business cost, consumer demand in retail businesses, and market competitiveness are highlighted by a fiscal policy for showing the effects of those facts in the practice of fiscal policy.

Impact of Monetary Policy on business activities within the UK

The central bank of the UK is the Bank of England and is mainly responsible for playing the role of stabilizing the financial system as a whole of the country. Therefore, the Monetary Policy has a great impact that is conducted by the central bank named Bank of England. Bank of England is the prime authorized institution for dealing with monetary policy. By conducting the monetary policy, it becomes useful for achieving the prospect of currency stability, managing as well as maintaining full employment in this economy of UK, even monetary policy has a great impact on the economic prosperity and it is contributing for the nation’s welfare as well as the welfare of people in the UK (George Leland Bach, 2011).

On the business activities within the UK, Monetary policy impact on the following areas:

Achieving the prospect of currency stability:

For doing business in an economy, it is more important to stabilize the currency because the fluctuation of currency rates disturbs the normal flow of business. It makes losses in business due to currency instability (Miles, 2014).

Maintaining full employment in this economy of UK:

On the prospect of business activities, maintaining full employment is mandatory because managing employment in an economy is most important because without creating employment opportunities, business activities will not run as smoothly because manpower has a great impact on the economy as they are the main contributor for stabilizing the economy.

Economic prosperity:

The assurance, as well as maintenance of economic prosperity, is mandatory on the prospect of business activities because economic prosperity is signal for business people that they can invest in a business with less risk as the economic prosperity is entitled to keep smooth and run through comfortably (Miles, 2014).

Control of note issues:

The aspect of controlling notes issued by Bank of England, holding of gold when required, keeping a well-balanced foreign exchange reserve has an impact on business activities within the UK because if the central bank does not have the control power then business imbalance will be created, therefore the economy will be in huge problem and all things are implemented as well as conducted by the monetary policy (Redo, 2013).

Use of an inflation target:

By conducting monetary policy, the use of the inflation target is evaluated by Bank of England where it seems to keep the inflation rate within the range of 2% to 3% in response to this economic cycle (Redo, 2013). Therefore, it will be shown the prospect of sustainable economic growth, the prospect of maintaining full employment in an economy, and successfully dealing with international competitiveness in the economy of the UK.

Use of Interest rates:

There has an impact on the economy as well as business activity due to higher interest rates where it is reducing credit growth rate and increasing savings return. Therefore, the reduction of national spending growth results in the reduction of GDP growth. Therefore, it will lead to an economic level at lower and declining the growth of employment as well as increasing the unemployment rate.

Changes of Money Supply:

The monetary policy has a great impact on the changes in the money supply because it is very crucial to deal with the money supply. Bank of England in the UK will now better when the money supply will be increased or when the money supply will be decreased that why the control of money supply is handled by the monetary policy (Ryoo and Skott, 2016). Moreover, the money supply could be increased by declining the reserve requirements of the banks, and vice versa.

Impact of Fiscal Policy on business activities within the UK

The fiscal policy is a very famous theory that describes that the government can influence macroeconomic productivity levels by increasing or decreasing tax and public spending on different sectors. The effects of the fiscal policy are not the same for every class of people in an economy. The overall policy depends on the political condition and policymakers of the economy and the country (Ryoo and Skott, 2016). The UK economy is considered as one of the most globalized economies in the world. The economy is experiencing one of the worst economic problems which are- unemployment, large budget deficit, and other related issues. The fiscal policy is not widely used in modern days but it can impact the economies of the UK in the following ways:

Help to prevent inflation rate:

The inflation and recession rate are major economic problems in recent years. Hereby using the fiscal policy government of the UK can increase the rate of tax and decrease the spending rate to overcome the problems of recession and inflation. It will also help to reduce the budget deficit, aggregate demand, and inflation pressure on the economy.

Overcome recession problem:

To overcome the recession problems the government of the UK can focus on increasing aggregate demand and government spending. They also take some major steps to cut out the taxes which will eventually increase the disposable income of the economy. Overall it will increase the economic growth of the UK and reduce their unemployment problem (Stakic, 2014).

Increase tax rate and reduce public spending:

As the UK has a large budget deficit problem they can focus on increasing the tax rate by using fiscal policy in their economy. It will also help to decrease public spending and reduce inflation. The problem of the budget deficit can get improved too.

Stabilize economic growth and the balance of economic cycle:

Fiscal policy also helps to ensure the economic growth of the UK and bring a balance in the economic cycle to improve the overall management and functions of economic policy to improve the prosperity and growth of the economy. It is one of the most useful ways to develop a better economic policy for the UK. The government can use fiscal policy to moderate the economic cycle of the country in a recession (Stakic, 2014). Through the process, then the government can easily get the benefit of receiving lower tax revenue. For the benefits, they can spend more on unemployment benefits and create employment opportunities for the citizens of the country.

Importance of Expansionary fiscal policy:

Expansionary fiscal policy can directly create jobs and economic activity into the economy. It is necessary in a recession period in the economy. The policy enables unused savings and idle resources to put into work for the betterment of the economy. In a deep recession and liquidity trap, fiscal policy enables the government to focus on new investment schemes and creating jobs by encouraging businesses to invest. It can be more beneficial than monetary policy in some situations.

Moreover, the fiscal policy impacts the economy of the UK by manipulating tax rates, interest rates, and government spending for the betterment of the economy. It is one of the most popular economic policies in crisis situations to resolve the problems of the economy and overcome the challenges to move into a stable economy.

Global and Regional Factors

Both the fiscal policy and monetary policy want to influence the country’s economic growth in the short run of its business, though some factors like global and regional factors make some difference to fulfill the policy targets. The global and regional factors of monetary and fiscal policy fulfill the way of operation and functions of the policies. It depends on the management and efficiency of the monetary and fiscal policy to focus on the overall management of the country (Woods, 2010). The factors of global and regional sectors can benefit the policies and sometimes create some challenges for them. Microeconomic objectives are fulfilled by both of these two types of policies. The global and regional factors which play a significant role in the monetary policy and fiscal policy in shaping business activities of UK are described below:

In the mix of interest-sensitive industries:

All industry does not respond in some way because of the changes in interest rate. As changing interest rates affect differently on people’s ability like one may refuse to buy a new house and on the other hand one may want to invest in new construction and so on. Region to region may vary and it can spread localized replies differently crossways region. The sensitivity of the interest rate policy can impact the business industries depending on their way of functioning and management in their industrial sectors. Fiscal or monetary policy helps them to focus on the changes of the interest rate and develop the strategies for the betterment of the industries based on the interest sensitivity issues.

Regional changes in the capability of banks to change their balance sheets:

Based on fed policy, all banks’ ability to make loans are not the same. The banks are regulated by the central bank and function according to the policy implemented by the government. In the time of restricted monetary policy, some banks create loans from other external sources at a cheap rate compared to others (Woods, 2010). Here is also regional factors work to decide the capability of the banks to generate loan amount and lend it to the people to flourish the business. The overall changes can bring some significant effects on some industries and changes their balance sheet performance. That is why making loans in the small bank and the large bank is highly unequal from place to place which refers to monetary policy that could have some regional effects on shaping business and business policy in short periods of time.

The difference in the combination of the big and small borrower:

It is important to measure the combination of large and small borrowers. Mostly the economy has small borrowers huge in numbers compared to the large borrowers. Large borrowers have so many options to avail their loans and it is also easy for them to manage the loan and interest with their big pile of business activities. Whereas, small borrowers have only one source to collect their desired loan that is banks. They have to go for bank loans and think about the functions of their business to generate enough profit to provide the rate of interest. But because of monetary policy, they face constraints to get a loan from banks and the business activities also get harmed reducing their opportunity of flourishment (Yunanto and Medyawati, 2015). Though the percentage of small firms is higher than that of large firms, still the large firms get more benefits for the global and regional factor consideration.

Year of administrative populism:

In the year of higher political populism, handling strong economic growth and increasing productivity rate is not possible. The political turmoil and inefficiency of economic policies can affect the globe and regions to fulfill the needs of the country. This will disappoint the leaders to compete with long term challenges in the future and slowly reduce the trust in government.

Global insecurity and the refugee crisis:

Connect with globally, may be risky in some cases when there are changes in political government and that will impact both the fiscal and monetary policy on an economy. It creates global insecurity and also the migration of humans may also happen. Due to higher migration may cause short term higher GDP growth but in the long run, it may not continue. That’s why it greatly impact the business shaping through the fiscal and monetary policy of a country.

The referendum on Brexit:

Uncertainty consists of the referendum. The financial and radical significances of a British move towards separateness are devastating. For this Brexit, both the fiscal policy and monetary policy has faced an uncertain situation in shaping business and economic growth. Brexit brings both good and bad features for the economy for the UK (Yunanto and Medyawati, 2015).

Conclusions

Though both of the policy has its own way of functioning apart from their benefits and differences, the UK can use a middle ground by combining both of the policies from resolving economic challenges. The banks and the government need to be more cautious and organized when the economy needs proper guidance and solution to overcome a difficult and irregular condition. As their decisions can move global equity and bond markets in a different way (Yunanto and Medyawati, 2015). Fiscal policy will always have some greater effect on the economy for the longer periods of time and monetary policy will have some short time success and impacts on the UK economic condition. So the well planned and conscious movement can improve the economy of the UK in a better way.

References

  1. Fisher, D. (2014). Monetary and fiscal policy.Palgrave Macmillan.
  2. George Leland Bach (2011). Making monetary and fiscal policy. Washington, Brookings Institution.
  3. Miles, D. (2014). Monetary Policy and Forward Guidance in the UK. The Manchester School, 82, pp.44–59.
  4. Redo, M. (2013). The growing importance of the risk-taking channel in the process of transmitting monetary policy. Toruńskie Studia Międzynarodowe, 1(6), p.13.
  5. Ryoo, S. and Skott, P. (2016). Fiscal and Monetary Policy Rules in an Unstable Economy. Metroeconomica, 68(3), pp.500–548.
  6. Stakic, N. (2014). The role and importance of ECB’s monetary policy in the global economic crisis. Megatrend revija, 11(1), pp.41–52.
  7. Woods, R. (2010). The Role of Fiscal Indicators in Setting Fiscal Policy in the UK. SSRN Electronic Journal.
  8. Yunanto, M. and Medyawati, H. (2015). Fiscal Policy and Monetary Policy: Sensitivity Analysis. International Journal of Trade, Economics and Finance, 6(2), pp.79–84.

Written by

Md. Shadequr Rahaman

Email: [email protected]

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