Well no-one can say that Gordon Brown has had an easy ride: the war in Iraq, MPs’ expenses, flooding, strikes, unemployment, and of course a recession. Will the banking crisis and its knock-on effects prove to be the straw that broke the camel’s back? Only time will tell.
The UK economy will be voting within the next few months and the elected party will play a crucial role in our economic recovery. Public debt reached £829.7 billion at the end of October (59.2% of GDP) and with falling tax revenue and rising government spending, it could get considerably higher. “State borrowing grew by £16.1 billion last month (August) – almost twice the entire budget for the 2012 Olympics.”
The outcome of the election will not only play a role in determining how the UK fares over the next few years in terms of our economic recovery, but it will also indicate the likely direction that policy will take towards areas such as education, healthcare, poverty, pensions, etc. The housing market is also likely to be significantly affected and not just by the election. With the end of the stamp duty holiday approaching, demand for housing may begin to fall in the new year, which could spell a fall in house prices.
No matter what happens, it will be interesting to see the direction of government policy over the next few years, given the spending cuts we are likely to experience.
Public debt hits £800 billion – the highest on record Times Online, Patrick Hosking (19/9/09)
Labour polls fuel talk of early election date Mirror News, James Lyons (14/12/09)
Pre-election politics dictate the Bank of England’s economic policy The Independent, Stephen King (14/12/09)
David Cameron and Labour ready for ‘snap election’ BBC News (13/12/09)
So who said what to whom? The truth about the cuts debate Independent, Steve Richards (15/12/09)
Is UK government debt really that high? BBC News, Richard Anderson (22/12/09)
For data on public-sector finances, see:
Public Sector National Statistics Office for National Statistics
For a lighthearted look at the relationship between elections and the economy (in the context of the Philippines), see:
Election and other economic boosters Manilla Bulletin Publishing Corporation, Fred Lobo (14/12/09)
Questions
- How are economics and politics related? Think about how the up-coming election is likely to affect government policy and why.
- What are the main economic policies proposed by the Labour government? How do these aim to help the UK economy recover?
- What are the main economic policies proposed by the Conservative government? Will these policies be any more effective than Labour’s?
- The Conservative party is ahead in the polls at the moment: why do you think this is? To what extent has Labour’s popularity been affected by the way the government has dealt with the banking crisis?
The pound is regarded as an international currency. However, the financial crisis has caused the value of the pound to fall, reaching a four-month low against the euro in September. This recent weakening of sterling is partly the result of worries that the Lloyds Banking Group will find it difficult to meet the ‘strict criteria to leave the government’s insurance scheme for toxic banking assets’ set for it by the Financial Services Authority.
However, one of the main reasons relates to recently published figures showing UK debt (see for data). The UK’s public-sector net borrowing has now reached £16.1bn and the government’s overall debt now stands at £804.8bn: 57.5% of GDP. This represents an increase of £172bn in the past year. Over the longer term, this is unsustainable. The government could find it increasingly difficult to service this debt. This would mean that higher interest rates would have to be offered to attract people to lend to the government (e.g. through bonds and bills), but this, in turn, would further increase the cost of servicing the debt. Worries about the potential unsustainability of UK govenrment debt have weakened the pound.
But isn’t a lower exchange rate a good thing in times of recession as it gives UK-based companies a competitive advantage over companies abroad? The following articles consider UK debt and the exchange rate.
Pound plumbs five-month euro low BBC News (21/9/09)
Market data Telegraph (22/9/09)
Pound slides back against dollar and euro Guardian (21/9/09)
Pound drops as UK stocks fall for first time in seven days Bloomberg (21/9/09)
Public sector borrowing soaring BBC News (18/9/09)
Govt spending cuts ‘could help pound’ Just the Flight (21/9/09)
Pound dips to four month euro low BBC News (18/9/09)
Weak pound hits eurozone holidaymakers Compare and save (21/9/09)
Questions
- What is the relationship between public debt and the value of the pound? How do interest rates play a part?
- What is quantitative easing and has it been effective? How does it affect the exchange rate?
- What are the advantages and disadvantages of a freely floating exchange rate relative to a fixed exchange rate?
- If the UK had joined the euro, do you think the country would have fared better during the recession? Consider public debt levels: would they have been restricted? What would have happened to interest rates? What would have happened to the rate of recovery
The global economy has been in a recession since December 2007, but have we now passed the worst of it? Whilst companies are still going bankrupt, unemployment is still rising, the housing market is still looking pretty gloomy and government debt surely can’t go up anymore, there are indications that we’ve reached the bottom of the recession. There are murmurs that the economy may start to recover towards of the end of the year.
But, of course, economics wouldn’t be economics if there wasn’t considerable disagreement. Many still believe that the worst is yet to come. According to the OECD, the recession is ‘near the bottom’. Yet, output in the UK is still set to decline by 4.3% in 2009, and by 2010 the budget deficit is predicted to have grown to 14%. Unemployment is at its highest since November 1996, but US consumer confidence is said to be rising and the pound is climbing. Read these articles and make up your mind about the state of the UK and global economy!!
Business and Consumer Surveys (After following link, click on chart) European Commission, Economic and Financial Affairs (29/6/09)
Pound climbs against euro as King sees signs recession easing Bloomberg, Lukanyo Mnyanda, Gavin Finch (20/6/09)
Bank says banking crisis easing BBC News (25/6/09)
First signs of optimism returning to some parts of financial services CBI PRess Release (29/6/09)
Darling and King agreed on tentative recovery Guardian, Ashley Seager (17/6/09)
Sharp contration for UK economy BBC News (30/6/09)
Housing market knocked by price falls Moneywise (22/6/09)
OECD says recession ‘near bottom’ BBC News, Steve Schifferes (24/6/09)
US Federal Reserve says recession is ‘easing’ Telegraph, James Quinn (24/6/09)
Public borrowing at record levels BBC News (18/6/09)
Leading index suggests recession easing UPI.com (18/6/09)
US consumer confidence up in June BBC News (26/6/09)
Blow for housing market as prices fall The Independent, David Prosser (22/6/09)
Most UK businesses freeze pay as recession bites, CBI says Telegraph, Peter Taylor (23/6/09)
Questions
- What are the typical characteristics of a recession? Do the current statistics of the four main macroeconomic objectives fit in with what economic theory tells us?
- Which policies would governments normally implement to get a economy into the expansionary/recovery phase of the business cycle and how do they work?
- Why is consumer confidence so key to economic recovery?
- What type of banking regulation is needed to prevent a similar crisis happening again?
- Movements in the housing market are often seen as indicators of the state of the economy. Why is this?