Unit 2 Macro: New to Macro - Kick-starting the British Economy

Many AS students will be starting their introductory macroeconomics courses and lots of you will be keen to make a great start and achieve momentum in their work from the word go! The same can be said about the British economy!

One of the key issues at this time is how best to inject some growth of demand, production and jobs into an economy that has struggled to climb out of recession. Indeed GDP remains well below the peak seen just before the start of the recession in 2008-09. The UK's economy is expected to contract by 0.7% this year, according to a new forecast from the Organisation of Economic Cooperation and development (OECD).

There is no shortage of advice to the government and to beleaguered Chancellor George Osborne about the types of "shock therapy" that the economy requires at the present time. The consensus among mainstream economists is that the main problem facing the economy is a lack of demand for goods and services, otherwise known as aggregate demand.

When demand is weak, businesses need to produce less and employ fewer workers. They also find it harder to make profits and have little incentive to increase their own investment spending to boost their own supply capacity.

Demand for goods and services can come from households living and working in the UK, from overseas consumers when we sell exports and also from Government whose own spending (including welfare payments) reaches nearly 50 per cent of national income.

What kinds of measures are being put forward to stimulate demand? Prime Minister Cameron has claimed that every government Minister is now working full time on getting the economy to grow - easy words for a politician to say, harder to put into practice with fully-thought through policy initiatives!

The Guardian reports here that the Government is likely to relax planning laws to make it easier for home-owners and small businesses to build extensions to their properties. The hope is that this will boost the construction industry which accounts for nearly 8% of national output each year.

The government will also be boosted by the news that car-manufacturer Honda is set to invest £267m in it's main car plant at Swindon in Wiltshire. 60% of their output is sold overseas creating valuable export revenues for the UK and the increased capacity at the factory will bring new jobs not just to those working at Honda but also in the many supply-chain businesses that provide components, technology and services to Honda. Car marking is one of the bright spots for the UK economy at the moment - can the growth and fresh investment be sustained?

New rankings on competitiveness published by the World Economic Forum show that the UK has climbed to eight place - a rise of two places on the 2011 figures. A strong showing in competitiveness indicators is a healthy sign for the economy not least because it suggests that Britain remains a favoured location for inward investment projects. (By the way, Switzerland came first!) See this video: Switzerland heads global competitiveness

In truth the government's hands are tied by their insistence on sticking to the planned strategy of cutting the budget deficit through a mixture of spending reductions and tax rises. Critics of the government argue that they should show more ambition in their growth policies and change tack, focusing on giving the economy a fresh boost of demand to lift national output and give businesses the signal to expand employment and release cash into investment.

The Trade Unions believe that VAT should be cut (to lower prices and boost people's real incomes), extra government spending should be targeted for youth training , science and technology research and into renewable energy projects,

Keynesian economist Jonathan Portes argues here that immediate and significant investment in the UK's creaking infrastructure is important for both the short and long term health of the economy. He writes "we can afford to borrow, spend and invest. Indeed, we can't afford not to." Like many others, he believes that extra house-building is a crucial first step alongside a temporary but large cut in National Insurance Contributions - this is a tax that is paid by both employers and employees whenever someone is taken on to the payroll of a business or organisation.

There are many others contributing to this debate - can you find some other examples from reading the newspapers and around other parts of the web?

You are starting your macroeconomics at a crucial time for the British economy. Things are tough at the moment, but there are pathways out of the gloom. What would work for you?