Coalition Economic Policies 2010-2013
Page last edited 02/08/2018
Several new links have been added at the end of this document in October 2013
For a detailed overall assessment of the UK Coalitions Government’s record 2010-2015 from the Institute for Fiscal Studies Click here
It has conventionally been argued that Governments should ideally pursue the following main economic policy objectives:.
- A high and stable level of employment.
- A low rate of inflation
- A relatively high rate of economic growth
- A satisfactory balance of payment situation with a stable exchange rate although in the event the £ was devalued 1n 1949 and 1967.
- Reference was also sometimes made to the need to influence the distribution of income although there were disputes as to how governments might wish to influence the distribution of income.
- Increasingly also government economic policy objectives are framed to reflect at least to some extent the concern to achieve long term environmental sustainability although it is argued by many that all post -2nd world war governments have given insufficient emphasis to environmental concerns in their approaches to economic policy making.
Unfortunately serious difficulties have often arisen in relation to the attainment of these objectives because they have often proven to be incompatible.
- For much of the post-war period high levels of employment and low inflation have proven to be incompatible in that high employment tended to lead to unacceptably high rates of inflation and low inflation could be achieved only with unacceptably high rates of unemployment. Matters worsened even more in the mid 1970s when inflation and unemployment increased simultaneously and this was followed by Mrs Thatcher's attempts to "squeeze inflation out of the system by tolerating historically high levels of unemployment, a policy which was partly successful in reducing inflation although it imposed considerable hardship on the unemployed There followed a long period of relatively high employment steady economic growth and low inflation under the Conservative Governments of 1992- 997 and Labour Governments of 1997-2007 in the so-called nice decade but this would come to an end with the onset of the credit crunch and subsequent economic recession.
- Additionally high rates of economic growth and high employment often generated balance of payments problems which led to deflationary policies and hence lower employment and reduced economic growth.
- In any case it has often not proven possible for the UK to achieve a satisfactory rate of economic growth especially relative to our main competitors.
- Increasingly the UK economy has experienced a relative decline in manufacturing industry which has to some extent been offset by the growth of services [especially financial services] but the crisis in the UK financial sector [also worldwide] could intensify our balance of payments difficulties as we find it increasingly difficult to earn enough from exports to finance our need for imports.
- It has been noted that the organisation of the UK economy has led to increasing amounts of private debt as individuals have financed their increasing demands for housing and consumer goods via increased indebtedness. This is unsustainable in the long term.
These general economic problems intensified as a result of the Credit Crunch and economic recession of 2007-2010.
Click here for a BBC item from Linda Yueh on the so-called "Doom Loop"
The economy was considered to be the most salient issue of the 2010 General Election Campaign which is hardly surprising given the onset of the Credit Crunch, the depth of the economic recession from 2008 to 2009 , the possibly precarious economic recovery in 2010, the growth of the budget deficit and the high level of National Debt and the likelihood of public expenditure reductions and tax increases once the General Election was over whichever party or parties were returned to power. George Osborne had promised in 2007 that, if elected the Conservatives would match Labour's Public Expenditure plans up to 2010-2011 but with the onset of the credit crunch and the economic recession the Conservatives had developed a much more critical analysis of Labour's economic policies.
- They claimed that the onset of the credit crunch and subsequent economic recession revealed clearly that Gordon Brown's much vaunted claim to have "abolished boom and bust" via effective management of the economy amounted to a gross distortion of the economic realities.
- According to the Conservatives the financial crisis which enveloped first Northern Rock and then major UK banks such as RBS and HBOS arose to a considerable extent because of the failure of the inefficient system of financial regulation which had been introduced by Gordon Brown.
- The UK's relatively high rate of economic growth high had been fuelled by excessive growth of personal and private corporate debt which were unsustainable in the long term.
- Labour's high rates of public expenditure in the boom years meant that Labour had failed to build up the budget surpluses which could be used to offset the budget deficits which would inevitably occur as a result of Government attempts to deal with the effects of the credit crunch combined with the effects of economic recession. Consequently both the public sector borrowing requirement and the size of the national debt were increasing alarmingly.
- The increases in the PSBR and the National Debt carried the threat that international credit rating agencies would downgrade the UK's AAA credit rating which would result in higher interest rates and increased borrowing costs which would further undermine the Government's finances and discourage both private investment and consumption which would restrict the possibilities of economic recovery.
- Keynesian- inspired attempts to generate economic recovery via the continuation of high levels of government spending and borrowing would inevitably fail and deeper cuts to public spending than were eventually proposed by Labour would be necessary if economic recovery was to be secured. During the General Election Campaign the Conservatives focused upon the need for immediate reductions of government expenditure of £6B over and above those proposed by the Labour Party
- The Conservatives recognised that these public spending cuts would lead to increased public sector unemployment but they promised that the burdens of public spending cuts would be evenly shared because "We are all in this together" and promised that they would introduce measures which would promote private sector employment thereby offsetting the effects of declining employment in the public sector.
- The Conservatives also attacked Labour's record on poverty and inequality. Thus they claimed that under Labour even if overall poverty levels had declined extreme poverty had actually increased; that income inequality as measured by trends in the value of the Gini Coefficient had actually increased between 19997 and 2010 and that rates of social mobility had fallen indicating a reduction in equality of opportunity. David Cameron stated on several occasions that a future Conservative Government should be judged on the effectiveness of its policies in improving the living standards and the life chances of the most disadvantaged members of UK society.
The inconclusive result of the May 2010 General Election led , after a period of inter-party bargaining, to the formation of a Conservative-Liberal Democrat Coalition Government under the Premiership[ of David Cameron. The Coalition certainly inherited a difficult economic situation and proceeded in the June 2010 Budget to implement an economic strategy based to a considerable extent on the Conservative analysis of the economic situation based upon points1-8 above..
Thus in this Budget the Coalition announced its intention to eliminate the Budget Deficit in the life time of one Parliament which would involve fiscal tightening [i.e. a combination of reduced government spending and tax increases] of £40 billion Pounds by 2014/15. 80% of this fiscal tightening was to come from reductions in government spending [and one third of these government spending cutes would be made up by cuts in welfare spending] while 20% of the fiscal tightening would come from tax increases :[ in particular VAT was to be increased from 17.5% to 20% which was expected to raise an additional £13 B by 2014/15 but there were also to be reductions in corporation tax [to stimulate the private sector of the economy ] and increases in income tax personal allowances designed to take increasing numbers of people out of income taxation [a policy much favoured by the Liberal Democrats.] In a subsequent Budget the Coalition would also reduce the 50P highest marginal rate of income tax[ which had been raised from 40P by the previous Labour Government] to 45P.
Click here follow some further links from this page for details of the Coalition's Plans as announced in 2010
Meanwhile Labour had denied the validity of the Conservative analysis of the overall economic situation
The Coalition's hope was that the deflationary effects of financial austerity [government expenditure reductions and taxation increases] could be offset by faster economic growth and job creation in the private sector of the economy. Furthermore the expansion of the private sector was to be facilitated by reductions in corporation tax and expansionary monetary policies involving low interest rates, quantitative easing and arrange of schemes designed to encourage bank lending. That is; deflationary fiscal policy was to be offset by expansionary monetary policy. It was hoped also that maintaining a relatively low exchange rate for the £ would stimulate export demand and reduce import demand which also would contribute to the recovery of economic growth and that the Government's Work Programme would help to reduce unemployment and stimulate employment which again would contribute to economic growth and help to improve the public finances.
Notice therefore that although government fiscal policy is a very important element of overall government economic policy it must be analysed in conjunction with monetary policy. exchange rate policy and supply side policies designed to reduce unemployment and increase employment. These other aspects of economic policy are considered later in this document.
Unfortunately the economic growth forecasts published in 2010 by the Office of Budget Responsibility proved overoptimistic and it appeared that the UK economy experienced a 2nd recession in 2011-2012 as well as alternating quarters of low but positive and negative economic growth throughout the Coalition's current term of office and these lower economic growth rates meant also that the projected rate of deficit reduction would not now be achieved because reduced economic growth necessarily results in reduced taxation revenues and increased spending on unemployment benefits. Click here for recent data on GDP trends. However click here for a recent item from the BBC [May 2013] reporting that the ONS now believes that there was no double dip recession in 2011-12!! And now click here and here for BBC items [June 2013] reporting that the ONS has indeed revised the double dip recession out of existence.
These disappointing economic growth and budgetary trends caused the Credit Rating Agency Moody's to downgrade the UK's credit rating in February 2013 which, could possibly be expected to increase interest rates on long term government borrowing and to cause some potential embarrassment for Chancellor Osborne for whom the maintenance of the AAA credit rating had been a key component of his economic strategy. [Click here for BBC coverage of the downgrading of the UK's credit rating.]
Further controversy arose in March 2013 when Prime Minister David Cameron apparently misrepresented the position of the Office of Budget Responsibility as claiming that the relatively slow growth of the UK economy had been caused not by the deflationary fiscal policies of the Coalition Government but primarily by external factors related to the slow rate of growth of the Euro Zone economy which could be expected to reduce UK demand for UK exports . However the OBR which the Coalition had set up as an independent forecasting organisation quickly illustrated its independence when its Director Robert Chote [formerly Director of the Institute of Fiscal Studies] published an open letter to David Cameron in which he pointed out that on the OBR view the slow growth of the UK economy was due, at least in part to the Government's deflationary fiscal stance. Click here and here for further information.
In these circumstances many [but certainly not all economists regularly called for a so-called Plan B involving at least a small temporary fiscal stimulus in an attempt to achieve a faster rate of economic growth but George Osborne regularly stated that he intended to continue with the original austerity package despite the fact that economic growth was weaker and the pace of deficit reduction slower than had originally been envisaged.
As the 2013 Budget approached there were fears that the UK economy might actually enter a triple dip recession and immediately prior to the 2013 Budget Coalition Business Secretary Vince Cable also called for an economic stimulus package [a version of Plan B] but again George Osborne appeared unmoved.. However shortly after the Budget a second ratings agency [Fitch] removed the UK's Triple A credit rating [for further information see Fitch Downgrade of UK Credit Rating and George Osborne and Christine Lagarde and the IMF chief economist April 19th and although In the event the UK economy avoided the triple dip recession UK economic growth prospects remain gloomy.
|Further Information on the 2013 Budget
Click here for Guardian coverage of 2013 Budget
Click here for BBC coverage of 2013 Budget for a particularly useful item on the distribution of the burden of austerity
Click here for nice introduction to the 2013 Budget
Click here for Guardian Podcast. Very good but also quite technical
Click here for an H. M. Treasury Infographic on the 2013 Budget
Click here for an H. M. Treasury Infographic on the 2012 Autumn Statement
In any assessment of the Coalition's overall economic strategy it is therefore essential to analyse whether or not the Coalition's plans for deficit reduction have been too rapid. This an exceptionally difficult issue of applied economics but it may possibly be that support within the Economics profession for a slower rate of deficit reduction is increasing . I include four useful links to written items discussing this issue and three clips of TV Discussion on "The Daily Politics" but it will certainly require further discussion in class.
Click here for Evan Davis on Plan A versus Plan B
Monetary Policy , Exchange Rate Policy and Employment Policy
The main focus of the debate on Coalition government economic policy has certainly been on Fiscal Policy but it is also important to consider other important elements of government economic policy.
- Monetary Policy
- Quantitative easing Politics.co.uk
- The Bank of England and Inflation Targets [Stephanie Flanders for the BBC]
- Click here and here BBC coverage and here for Guardian coverage of Bank of England monetary policy ["Forward Guidance"] under new Governor Mark Carney
- Click here and here and here for more BBC coverage of Mark Carney [August2013]
Also during the course of 20008 -2013 both Labour and Coalition Governments have introduced three separate schemes designed to encourage Bank lending which in principle should generate greater aggregate Monetary demand via the stimulation of investment demand and consumer demand thereby helping to revive the economy. However in the current economic climate the banks have been obliged by the Bank Regulators to increase their capital reserves and have also tended to believe that in the current economic climate many potential borrowers might not be sufficiently credit worthy for example because borrowing companies might find it difficult to make sufficient profits to repay loans and because borrowing consumers might face considerable job insecurity which might reduce their abilities to repay loans. Consequently attempts to encourage increased bank lending have not been especially successful. Additional information is provided via the following links.
- Click here and here and here for Project Merlin
- Click here for its replacement National Loan Guarantee Scheme
- Click here and here and here and here for BBC coverage of Funding for Lending.
It should be noticed also that the Conservatives especially were very critical of the system of financial regulation introduced by the previous Labour Governments and introduced reforms of the regulatory system in 2013. Click here for some additional information from the BBC.
Click here for a Panorama Programme on Bank Bonuses
Click here for BBC coverage of Government decision that reckless bankers could be jailed
- Exchange Rate Policy
A country's exchange rate measures the value of its currency in terms of a foreign currency: e.g.. the £-$ exchange rate is currently approximately £1 =$1.50. The effective exchange rate for sterling measures the price of sterling in terms of a basket of the currencies of our major trading partners weighted according to the relative importance of each trading partner.
Sterling's effective exchange rate depreciated approximately 20% in 2009-10 since when it has remained fairly stable. Other things equal a relatively low UK effective K exchange rate reduces the foreign currency price of UK exports and increases the domestic currency price of UK imports so that the UK economy becomes more competitive.
Again, other things equal Sterling's low effective exchange rate should improve the r current account balance of our balance of payments, help to create additional jobs and help the UK economy out of recession. However the slow economic growth of our European and North American trading partners serves to restrict the growth of our exports to these countries and therefore reduces the likelihood of export led growth, another reason why the UK rate of economic growth has remained low and unemployment has remained high since 2008.
Click here for BBC coverage of fall in exchange rate July 2013
- Employment Policy
Unemployment : General
Unemployment fluctuated between 1,5M -1.6 M between 1997 and 2007 but during 2008 unemployment rose from approx 1.6 M to 2.5M . It rose even further in 2006 since when it has fallen back slightly to around 2.5 M. The increase in unemployment since 2007 can be regarded as primarily Keynesian unemployment caused by the short fall of aggregate monetary demand which caused the economic recession.
Keynesian unemployment can in principle be reduced by a combination of expansionary or reflationary fiscal policy [ = reductions in taxation and/or increased in government spending] and expansionary monetary policy [= reduced interest rates and /or reduced credit restrictions designed to increase bank lending.] However given the Coalition's emphasis on the need to reduce the budget deficit expansionary fiscal policy was very unlikely although perhaps the fact that the deficit is being closed more slowly than was originally planned may mean that George Osborne has intentionally restricted the extent of fiscal austerity . Expansionary monetary policy has been used: interest rates have been kept low; there has been considerable quantitative easing and three separate schemes designed to increase bank lending. However in the current economic climate many consumers and businesses have been unwilling to borrow preferring instead to pay down their debts while the Schemes designed to increase bank lending have also been relatively unsuccessful because banks desires to rebuild their own capital reserves have dissuaded them from lending even if they have had resources to lend.
As mentioned above it is also the case that a low exchange rate could in principle help to reduce UK Keynesian unemployment but negligible economic growth in Europe and the USA has inhibited the growth of UK exports even at a low exchange rate and so this potential solution has also not proven possible.
This has led the Coalition Government to rely upon supply side measures to reduce unemployment. Thus there have been reductions in corporation tax designed to increase incentives to invest and a reduction in the top rate of income taxation from 50P to 45p designed to encourage high income earners to work harder which, it is hoped will also stimulate job creation. Perhaps most significantly the Coalition hopes to increase employment and reduce unemployment by means of the Work Programme details of which are provided below.
The Work Programme
The Coalition's new employment policy entitled the Work Programme replaced existing employment schemes and was launched in June 2011. Under the terms of the Work programme the Government has contracted 18 prime service providers including Serco and G4S and hundreds of smaller subcontractors including voluntary sector groups such as Mencap, the Citizens Advice Bureau, the Prince's Trust and Action for Blind people to provide support for and advice for claimants seeking work. The Government's Website states that individuals may have to join the Work Programme if you have been getting JSA for more three months and also that individuals whoa re receiving the Employment and Support Allowance and are in the Work Related Activity Group may have to join the Work Programme and that those who are supposed to join but fail to do so may have their benefits withdrawn temporarily and possibly permanently.
[ I shall provide informationon the Employment and Support Allowance in a future document].
The service providers receive and initial fee for each person joining the Scheme but are paid fully only once a client has been in employment for 2 years. The Government is expected to pay service providers £5 Billion but it envisages that eventually fees paid to the service providers will to a considerable extent be offset by reduced benefit payments which means the Work Programme will represent good value for money.
It should be noted that it is no simple matter to help the long -term unemployed into work especially in the current climate where unemployment is currently around 2.5 million compared with and estimated 500,000 vacancies. Nevertheless the Work Programme has been subjected to several criticisms.
- In the first year of the Work programme 3.5% of clients had found work lasting at least 6 months compared with the DWP's own target of 5.5% .
- It has been argued that the Service Providers are unlikely to set up schemes in areas where unemployment is particularly high.
- It has been argued that Service providers might concentrate on helping to secure employment for their most clearly employable clients and that severely disadvantaged clients might receive insufficient help since the fees are insufficient to incentivise the Service providers to provide such help..
- It has been argued that the continuing high levels of unemployment has overwhelmed some Service Providers and that they have been forced to provide Online and/or group help rather than the individualised personal support which was envisaged in the Programme.
- It is argued that some Service providers offer far better assistance than others and in one case [A4E] there have been accusations of financial fraud.
Nevertheless the Government defend the Work Programme on the grounds that 200,00 clients found at least some work in the first year of the Work programme even if it was relatively short term employment and that the Programme will be more effective once the overall state of the economy improves. Click here and here for some additional information from the BBC and here for a detailed National Audit Office Report.
The Coalition clearly did inherit a very difficult situation when they came to power although there are disputes as to the degrees of responsibilities for the situation which should be attached to financiers, to regulators and to the Labour Government. The Coalition has embarked on a programme of economic austerity designed to restore the government's finances but it should be noticed that this restoration of the governments finances is taking longer than original intended and that economic growth has remained at best fragile since the 2008.
It may be that a slower rate of deficit reduction may have resulted in a slightly increased rate of economic growth but even if this is the case there remains the serious problem that because of perhaps excessive reliance on the financial sector and the relative decline of manufacturing industry the UK has a chronic balance of payments problem and although all political parties speak of the need for rebalancing of the economy toward manufacturing this will clearly not be easy to achieve. We may currently be "whistling in the dark".
Finally, for the time being, click here for BBC, and here for Independent coverage of the most recent IMF assessment of the state of the UK economy. [May 22nd 2013] and click here for Andrew Rawnsley's article [May 26th] on growing opposition to further public expenditure cuts within the Cabinet as Cabinet Ministers seek to protect their own departmental budgets.
|Additional links. There is never ending information on this topic. Some of these links could be integrated into the text of this document
Click here for help to buy scheme
Click here for the full text of the Coalition Agreement
more on various recent budgets
Click here for BBC Budget 2012
Click here for Guardian coverage of 2013 Budget
Click here for nice introduction to the 2013 Budget
Click here for Guardian Podcast. Very good but also quite technical
Click here for Guardian latest information on 2013 Budget
Click here for Larry Summers on UK economic policy
Additional Links from June 2013 onwards
Click here for BBC coverage of June interest rates and quantitative easing
Click here for BBC coverage of UK inflation rate including increased rate of inflation in May 2013
Click here for BBC coverage of Ed Miliband's announcement that, if it wins the next General Election, Labour will not use additional borrowing to reverse the Coalition cuts. June 22nd
Click here for all Guardian coverage of Mark Carney
Click here for Observer article by Will Hutton on the politics of the spending review, especially the changes to jobseeker's allowance regulations June 29th
Click here for Independent article by Andrew Grice on the politics of the Spending Review June 28th
Click here for IMF upward revision of UK growth forecast July 9th
Click here for BBC coverage of the Conservatives and post-General Election taxation policy
Click here for BBC coverage of recent unemployment figures [July 2013]
Click here for BBC coverage of UK growth data July 2013
Click here for Guardian article by Ha Joon Chang on the economy
Click here for Independent article on the economy by Jonathan Portes
Click here for Independent article on taxation and the distribution of income by Jonathan Portes
Click here for Guardian article by Peter Kellner on voter perceptions of state of the UK economy
Click here for very useful BBC item from Stephanie Flanders on the state of the UK economy in September 2013
Click here for a recent critical view of the Austerity programme
Click here for BBC coverage of IMF forecast of increased UK economic growth
Click here for BBC coverage of decline in UK government borrowing in September 2013
Click here for BBC coverage of continued economic recovery June-September 2013
Click here for BBC coverage of the Bank of England view that the UK recovery has taken hold
Click here for a cautionary view on the recovery from Robert Peston
Click here for BBC report of continued caution from the Bank of England
Click here for a critical assessment of the state of the UK economy from Larry Elliot