4.5.4 - Macroeconomic policies in a global context Flashcards
What are the main government policies to used
Use of fiscal policy, monetary policy, exchange rate policy, supply-side policies and direct controls in different countries, with specific reference to the impact
of:
o measures to reduce fiscal deficits and national debts
o measures to reduce poverty and inequality
o changes in interest rates and the supply of money
o measures to increase international competitiveness
define austerity
economic policy aimed at reducing a government’s budget deficit through increases in government revenues - via tax rises - and/or a reduction in government spending or future spending commitments.
measures to reduce fiscal deficits and national debts
1) stimulate aggregate demand; economic growth
2) austerity
maybe…
- fiscal policy
Why should we reduce national debt?
“crowding out theory” argues that increased government spending & borrowing then increases the supply of bonds, driving bond prices lower and leading to higher interest rates in the market for loanable funds.
- If interest rates rise, then this might cause a contraction in planned capital investment by private sector businesses because borrowing costs have become more expensive.
- As a result, weaker investment causes a fall in aggregate demand and also has a negative effect on a country’s productive capacity and trend growth.
- Cutting the national debt and improving the government’s credit rating might therefore help keep interest rates lower and help encourage consumption & investment from the private sector.
https://www.tutor2u.net/economics/reference/essay-answer-assessing-the-case-for-cutting-the-national-debt
refer to first diagram on this page
evaluate the idea we should minimise the national debt with case study
- point: depends on the underlying causes
- UK for example, increase in debt from 2010 - 2016 bc of the bail-out of some banks and also a decision by UK gov to allow the automatic stabilisers of fiscal policy to work during the post-crisis recession
- Without that initial fiscal stimulus, alongside deep cuts in monetary policy interest rates, there was the real risk of a deflationary depression in the UK. There is no automatic relationship between the size of national debt and a country’s GDP growth prospects
- Keynesian economists argue that state borrowing to fund infrastructure whilst adding to debt in the short run – helps improve trend growth and will create extra tax revenues in the medium term.
Another reason favouring (using fiscal austerity policies) to control borrowing and cut the national debt
Point: high levels of debt cost billions of extra pounds in interest payments as the debt is serviced
- app: IN USA, the annual interest on the debt is nearly $500 billion. In the UK, with national debt approaching 97% of GDP, around 5% of government spending goes on interest payments which amounts to over £800m a week.
- explain: large opp cost on the government since les available to spend on edu, health,etc
- if the debt was lower, not only would interest payments fall, but that in the medium term, scaling back the debt allows for reductions in direct and indirect taxes which will then have a positive effect on aggregate demand and long-run aggregate supply.
evaluate your second point to favouring fiscal austerity policy
The scale of debt payments also depends on the yield on government bonds, and in the case of the UK and Japan, the current nominal yield on ten year debt was less than 2 percent in 2019. This means that – in real terms – the real interest rate on new debt is effectively zero. In this situation, Keynesian economists critique the idea of crowding out and counter argue that increased investment in social house, transport and healthcare has a strong fiscal multiplier effect which generates higher incomes and tax revenues in the future, thereby cutting debt.
Discuss UK’s use of austerity to reducce fiscal deficit and national debt
To decrease the national debt, the UK government has been using austerity since 2010, where they attempt to decrease spending.
- It would also be possible to increase taxes. Both of these are unpopular, could limit growth, and reduce living standards and income equality. Free market economists say that spending can be reduced by cutting out waste, but it is highly unlikely that these
efficiency savings will make a significant difference. Sweden used spending cuts and
tax increases to balance their budget in the 1990s.-
Economcis growth as a measure to reduce FD/ND
- alternative in the form of demand
stimulus by high spending , which will cause economic growth and therefore bring
about higher tax revenues. This will allow for budget surpluses and eventually a
reduction of national debt.
Risky ND method?
One way to reduce national debt would be for the government to default on their
loans but the economic cost of this is so large that governments only default if it is
the only option. Russia and Argentina have defaulted on their debts in the past
Another good case study for national debt policy
greece; soveriegn debt crisis of 2010
What are the uk government’s current fiscal rules and is it on track to meet them?
1) Debt should be on course to fall as a share of national income in five years’ time
+ or the latest forecast, published in November 2023, this meant that the debt-to-GDP ratio had to be forecast to be lower at the end of the 2027/28 financial year than at the end of 2026/27
2) Public sector borrowing should not exceed 3% of GDP in the fifth year of the forecast period
3) Some types of welfare spending must remain below a pre-specified cap
what is the uk doing right now in terms of tax jan 2024
- Chancellor Jeremy Hunt has been hinting at fresh tax cuts in the coming Budget, on top of the £20bn of reductions to personal and business taxes he announced in November, as he attempts to claw away at Labour’s consistent opinion poll lead
- The scope for tax cuts will hinge heavily on the remaining “fiscal headroom” that the government has as it seeks to meet its self-imposed fiscal rule of ensuring public debt falls as a share of GDP in five years.
measures to increase international competitiveness
supply side measures
exhcnage rate policies
How can supply side measures increase IC
- will improve productivity and flexibility and can involve taxes and deregulation.
- They can encourage competition, forcing firms to be efficient and thus competitive within the global market.
- They can place an emphasis on quality of
products and use tax incentives to encourage incentives. - Education will improve the skills of the workforce and help improve flexibility. The UK government has established the ‘Red Tape Challenge’, which aims to simplify regulation for businesses.
exchnage rate policies to icrease IC
may be used, and they may control inflation and macroeconomic stability. For example, China devalues their currency in order to
reduce export price
Point 1: evaluate policies that might be most effective in improving competitiveness
central bank to intervene in the currency market to bring about a competitive depreciation against the Euro. This might be done by lowering policy interest rates or by intervening directly to sell Zloty and buy Euros. A weaker currency would make Polish products relatively cheaper in Western European markets, as a result, there might be expenditure-switching effects as Poland sells more exports and domestic demand for imports contracts since they become more expensive priced in Zloty. A consequence of this might be that Polish exporters will make more profits and this could then help them to increase capital investment. This in turn could cause an increase in productivity which would help maintain competitiveness in the long-term.
application about poland
Poland is a country inside the EU single market but retains their own currency – the Zloty. 25% of Polish exports go to Germany
evaluate using competitive depreciation to increase IC in poland
the benefits might be eroded by some of the negative effects of a weaker currency. For example, Poland imports animal feed, vehicle parts and pharmaceuticals mainly from other EU countries.
- When the external value of a currency falls, then the domestic price of imported products almost inevitably goes up.
- This leads to a deterioration in the terms of trade meaning that Poland has to export more to pay for a given volume of imports.
- Crucially it can and does lead to a rise in cost-push inflation which reduces the real incomes of Polish consumers and also reduces the profits of Polish companies reliant on imports.
- Higher relative inflation can therefore make Poland less competitive inside the EU single market.
diagram shoing cost puhs inflation with left sras shift
agrument for using supply side policies to increase POLISH IC
- Poland was once a transition economy and has used a number of market-friendly policies during the move away from socialism.
- included reductions in corporation tax and income tax – for example income tax rates in Poland are 18% and 32% contrasted with 20% and 40% in the UK. L
- lower tax rates have encouraged a rise in the number of business start-ups and inflows of foreign direct investment into the Polish economy.
- This investment has added to the country’s capital stock and has helped to increase labour productivity which in turn is a key factor causing real per capita incomes to rise.
- Inward investment also creates the extra productive capacity which increases Poland’s export potential.
- Foreign-owned firms are said to account for over half of Poland’s exports and the revenue from profits made by transnational businesses manufacturing in Poland also generates extra tax revenues.
evaluate using SSPs to increase POLISH IC
cuts in direct taxation on household incomes and corporate profits might contribute to more inequality and relative poverty within Poland.
- Higher inequality can actually damage competitiveness over time in part because a widening gap between the lower middle class and poor households compared to the rest of society might lead to more people being unable to afford good quality education and health care.
- If education outcomes suffer, then a country will not be improving its human capital as fast as possible and this can lead to structural problems such as higher unemployment and ultimately, lower labour productivity which is a key factor influencing price competitiveness
poland has a big issue with brain drain and outmigration as many people leave move elsewhere in eu like the uk: In a little less than four decades, Poland’s working-age residents could shrink by 7.1 million from 22.2 million now, according to the study.
conclusions on policies that poland use to increase IC
- In the long-term, competitiveness is mainly determined by the supply-side performance of a country.
- Therefore, I would argue that Poland should use policies that increase investment in education to build up human capital and also encourage more women into the active labour force.
- Poland actually ranks higher than the UK in the PISA rankings for Maths, Science and Reading.
- And Poland ranks third for best computer programming talent, ahead of the US and India.
- Investment in early years, secondary and higher education provides the best platform for improving non-price competitiveness in areas such as innovation, adoption of artificial intelligence and robotic technologies which will matter in years to come
Why improve IC - why is it important
- rebalance an economy
- long term sustained grwoth requires good level of competitiveness - this is becoming more important, especially if the world becomes more globalised
Examples of IC policies
- gov spending on infrastructure; transport e.g , will imrpove efficiency of production so quicker and cheaper and lower prices = price COMP/ attract FDI bc
- tax incentives; lower corp tax, income tax, so more left over to invest on r and d, innovation
- deregulation: (hiring/firing laws, enviro laws, product safety laws)
- gov spending on edu; reform curriculum, apprenticeship (E.g lvey scheme in uk)
when using any one of these you need to state whethere it improves either price competitiveness, non price compeititiveness or attracts FDI
