The final debate between the three party leaders was mainly on the economy. A key issue under debate was how each party would cut the huge budget deficit and how households and businesses would be affected. Something that we may see in the future is a banking levy and possibly new powers given to the Bank of England to ‘ration credit in boom years’. Spending cuts and tax rises are inevitable, but there were differences between the parties as to the extent of these changes and when they are likely to occur. The articles below consider these important issues, as the election entered the final 72 hours.
The broadcast debate
Prime Ministerial Debate: The Economy BBC Election 2010
Articles and podcasts
Economic debate: Banks and a balanced economy BBC News, Peston’s Picks (29/4/10)
General Election 2010: a fact checker for the leaders’ debate on the economy Telegraph (29/4/10)
Tim Harford on the truth behind leaders’ claims BBC Today Programme (30/4/10)
Questions
- It is not unusual for countries to have a budget deficit, so why is the UK’s receiving so much attention in the election?
- What is the difference between retail and investment banking?
- What do you think David Cameron meant by giving the Bank of England power ‘to call time on debt in the economy’?
- What is the difference between the budget deficit and national debt?
- What are the arguments for and against cutting the budget deficit now, as the Conservatives want to do and cutting it in the next financial year, as Labour is suggesting?
The OECD published its latest interim assessment of the world economy on April 7. This showed a world gradually bouncing back from recession, with growing GDP (albeit at variable speeds in different countries), rising industrial production, increasing business confidence, a stabilising of financial markets, an easing of credit conditions and yet continuing low inflation.
The UK is forecast to have an annualised rate of growth of GDP in quarter 2 of 3.1%. This is the second highest of the G7 countries, behind only Canada. This would seem like good news – an economic spring for the UK.
Despite continuing growth in the OECD countries, in most of them recovery is fragile. The OECD thus recommends caution in removing the stimulus measures adopted in most countries and hence caution in embarking on measures to cut public-sector deficits. As the report states:
Despite some encouraging signs on activity, the fragility of the recovery, a frail labour market and possible headwinds coming from financial markets underscore the need for caution in the removal of policy support. Central banks have already begun to rein in the exceptional liquidity stimulus injected during the recession. Further action in this area will need to be guided by financial conditions. The normalisation of policy interest rates should be carried out at a pace that will be contingent on the strength of the recovery in individual countries and the outlook for inflation beyond the near-term projection horizon. As for fiscal policy, the sharp increase in government indebtedness in the OECD area during the downturn calls for ambitious, clearly communicated medium-term consolidation programmes in many countries. Consolidation should start in 2011, or earlier where needed, and progress gradually so as not to undermine the incipient recovery.
The following webcast from the OECD presents the report.
Webcast
Interim Assessment OECD, Pier Carlo Padoan, OECD Chief Economist (7/4/10)
Report
Portal to report and webcast OECD
What is the economic outlook for OECD countries? An interim assessment OECD, Pier Carlo Padoan (7/4/10)
Articles
Economy set to speed up and beat UK’s rivals, says OECD Independent, Sean O’Grady (8/4/10)
Economy poised for rapid expansion Financial Times, Norma Cohen and Daniel Pimlot (8/4/10)
OECD sees slower growth in US, Europe, Japan Sydney Morning Herald (8/4/10)
UK business confidence ‘hits four-year high’ BBC News (12/4/10)
British companies confident of recovery but need investment, BDO warns Telegraph, Angela Monaghan (12/4/10)
Questions
- What are the main findings in the report?
- What are the policy implications of the findings?
- What are the implications of developments in financial markets? What are the possible ‘headwinds’?
- What factors could threaten the recovery of the UK economy?
Transport issues in the UK are always newsworthy topics, whether it is train delays, cancelled flights, the quality and frequency of service or damage to the environment. Here’s another one that’s been around for some time – high-speed rail-links. Countries such as France and Germany have had high-speed rail links for years, but the UK has lagged behind. Could this be about to change?
The proposal is for a £30bn 250mph high-speed rail link between London and Birmingham, with the possibility of a future extension to Northern England and Scotland. This idea has been on the cards for some years and there remains political disagreement about the routes, the funding and the environmental impact. Undoubtedly, such a rail-link would provide significant benefits: opening up job opportunities to more people; reducing the time taken to commute and hence reducing the opportunity cost of living further away from work. It could also affect house prices. Despite the economic advantages of such a development, there are also countless problems, not least to those who would be forced to leave their homes.
People in the surrounding areas would suffer from noise pollution and their views of the countryside would be changed to a view of a train line, with trains appearing several times an hour at peak times and travelling at about 250mph. Furthermore, those who will be the most adversely affected are unlikely to reap the benefits. Perhaps the residents of the Chilterns would be appeased if they were to benefit from a quicker journey to work, but the rail-link will not stop in their village. In fact, it’s unlikely that they would ever need to use it. There are significant external costs to both the residents in the affected areas and to the environment and these must be considered alongside the potential benefits to individuals, firms and the economy. Given the much needed cuts in public spending and the cost of such an investment, it will be interesting to see how this story develops over the next 10 years.
Podcasts and videos
£30bn high-speed rail plans unveiled Guardian, Jon Dennis (12/3/10)
Can we afford a ticket on new London-Birmingham rail line? Daily Politics (11/3/10)
All aboard? Parties disagree over high-speed rail route BBC Newsnight (11/3/10)
Articles
The opportunities and challenges of high speed rail BBC News, David Miller (11/3/10)
Beauty of Chilterns may be put at risk by fast rail link, say critics Guardian, Peter Walker (11/3/10)
High-speed rail is the right investment for Britain’s future Independent (12/3/10)
Hundreds of homes will go for new high-speed rail line Telegraph, David Milward (12/3/10)
Questions
- Make a list of the private costs and benefits of a high-speed rail link.
- Now, think about the external costs and benefits. Try using this to conduct a Cost-Benefit Analysis. Think about the likelihood of each cost/benefit arising and when it will arise. What discount factor will you use?
- There are likely to be various external costs to the residents of the Chilterns. Illustrate this concept on a diagram. Why does this represent a market failure?
- How would you propose compensating the residents of the Chilterns? Are there any problems with your proposal?
- Will such a rail link benefit everyone? How are the concepts of Pareto efficiency and opportunity cost relevant here?
- To what extent would this rail link solve the transport problems we face in the UK. Think about the impact on congestion.
From the end of January to the beginning of March, the sterling exchange rate index fell by over 6% – from 81.7 to 76.5. Against the dollar, the fall has been even more dramatic, falling from $1.62 to $1.49 (a fall of 8%). What are the reason for this? And is the depreciation likely to continue? The following clip looks at what has been going on and whether the reasons are political, or whether there are other economic fundamentals that have contributed to sterling’s fall.
Stephanie Flanders on the pound BBC Politics Show, Jo Coburn and Stephanie Flanders (2/3/10)
Articles
One-way bet? BBC News blogs: Stephanomics, Stephanie Flanders (1/3/10)
Euro drops to lowest level in 10 months against dollar BBC News (2/3/10)
Fiscal and political fears hit sterling Financial Times, Peter Garnham (1/3/10)
Sterling’s slide is not just about polls Financial Times (2/3/10)
Sterling rout is more than a wobble over political uncertainty Guardian, Larry Elliott (1/3/10)
The pound is weighed down Guardian, Howard Davies (2/3/10)
Sterling jitters The Economist (1/3/10)
Sterling crisis might break Britain’s political and economic paralysis Telegraph, Jeremy Warner (3/3/10)
Questions
- What are the reasons for the depreciation of sterling between January and March 2010?
- Why was selling sterling a ‘one-way bet’ for speculators?
- Why might there have been ‘overshooting’ of the sterling exchange rate?
- Who gain and who lose from a depreciation of sterling?
- What is the likely effect of a depreciation of sterling on (a) inflation; (b) economic growth; (c) interest rates? Explain your answers.
- How do problems of government debt affect countries’ exchange rates?
As the news item, A Greek tragedy reported, the level of debt in Greece and also in Portugal, Spain, Ireland and Italy, has caused worries, not just for their creditors, but also for the whole eurozone. Here we give you the opportunity to listen to a podcast from the Guardian in which some of the paper’s main economic columnists, along with Observer commentator, William Keegan, discuss the effects of this debt on the euro. To quote the introduction to the podcast:
“In Brussels, European leaders have pledged ‘determined and co-ordinated’ action to help Greece – they won’t let it fail. Our Europe editor Ian Traynor says the announcement of a deal was designed to keep the markets happy.
But leaders of wealthier euro nations like Germany are hoping they won’t have to ask their voters to bail Greece out. Kate Connolly, our Berlin correspondent, explains why Germans are so reluctant to provide financial assistance.
It’s being seen as a defining moment for the euro. Economics editor Larry Elliott says not signing Britain up to the single currency was the best decision Gordon Brown ever made.”
The debt crisis facing the Euro Guardian daily podcast (12/2/10)
Questions
- To what extent is Greece’s debt a problem for the whole eurozone?
- Consider the arguments for and against bailing Greece out (a) by stronger eurozone countries, such as Germany and France; (b) by the IMF.
- What support for Greece would minimise the problem of moral hazard?
- How would you set about establishing whether the current eurozone is an optimal currency area?
- How do the current problems of debt affect the arguments about whether Britain should adopt the euro?