ECONOMIC PROBLEMS OF THE UK

Economic Problems of the UK



Economic Problems of the UK

Part one

What are the basic economic problems of the UK and attempt to allocate resourcese effectively?

UK economic problems

Decline in GDP. The IMF recently forecast UK GDP would decline by 3.8% in 2009. This makes the recession very deep. Rise in Unemployment. Unemployment figures recently passed 2 million and there is every likelyhood it will rise to 3 million by the start of 2010. Unemployment is the biggest cause of relative poverty in the UK. Unemployment is the most damaging event to people's quality of life. It is not just the decline in income, but the stress and depression associated with periods of unemployment. (Allen, Katie, 2010, 65-77)

Bank Lending. At the core of this current recession is an unwillingness / in ability for banks to lend. Due to global credit constraints banks have cut back on lending to firms, households and for mortgages. It has effected investment and demand for housing. Rise in Government Borrowing. The recession has caused a rapid rise in government borrowing. Public sector debt has risen to 47% of GDP and could rise to nearly 60% of GDP by the end of the recession. Including the liabilities of nationalised banks and the figures look even worse. Higher government borrowing has been a factor in the weaker Pound and raises the prospect of future tax rises. Yet, at the same time government borrowing is a key factor in limiting the depth of the recession

Solutions to economic problems

Hopeful Points of UK

We have More Longer Term Bonds. The UK has one of the highest percentages of long term bonds. The average debt maturity is over nine years. This means we need to refinance bonds less frequently. Long term bonds give greater stability in times of crisis. Though, we still have to sell many new bonds coming onto market. Flexible Monetary Policy. At least we have an option of depreciating the exchange rate and pursuing quantitative easing if necessary. This should ensure we have greater flexibility in avoiding deflation, which would be very bad for bond market and economy. However, the UK economic recovery still looks fragile. It is not clear our monetary policy has delivered strong growth yet. (Allen, Katie, 2010, 65-77)

Recovery in Finance Sector. The recovery in bank profits may be galling for many. But, it has left the Treasury with a paper profit on bank shares. When we bailed out the banks last year this looked hard to imagine. But, it definitely helps make our fiscal position look more attractive. (Allen, Katie, 2010, 65-77)

No history of defaulting on debt unlike Greece.

We have been through worse (national debt over 200% in late 1940s. Though, I'm not suggesting we could cope with anywhere near those debt levels now. Many factors are different e.g. lower private sector saving rate.

The Bank of England is now buying some of the gilts issued by the Government via the use of the printing ...