British Politics

Palgrave Foundations Series, second edition

by Robert Leach, Bill Coxall and Lynton Robins

Chapter 20 notes - Managing the Economy

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  • The Treasury and the Chancellor of the Exchequer remain at the heart of British economic policy making, along with a few other ministers, and their advisers.
  • Yet governments have limited powers to influence economies shaped by market forces. The British economy is part of an increasingly globalized economy, affected by global trends.
  • The main tools of government economic policy are direct intervention, fiscal policy and monetary policy. The balance between them has changed over the years with less direct intervention, and less reliance on fiscal policy to manage the economy, and rather more emphasis on monetary policy, with interest rates determined by the Monetary Policy Committee of the Bank of England.
  • The economic policies of successive governments in the post-war period have had to tackle deep-seated problems in a British economy that has suffered relative decline.
  • Although both the Thatcher governments and more recently the Blair governments have been credited with halting and reversing Britain’s relative economic decline, the record of both is now contentious.
  • New Labour’s economy policy was characterized initially by prudence and a restraint on public spending and taxation, subsequently by substantial increased spending and investment, particularly on health and education.
  • Although New Labour presided for a decade over low inflation, low interest rates, and (until the credit crunch) relatively high employment and steady growth, deep-seated problems in the British economy (under-investment, poor training, low productivity) were not resolved.
  • The financial crisis followed by recession faced by Brown’s government was global in scope and also severely affected other leading western countries. Yet over-dependence on financial services and the growth of personal and government debt rendered the British economy particularly vulnerable.
  • The crisis led to some revival of Keynesian ideas, with government action to stimulate demand to assist recovery from recession. However the bond markets and credit rating agencies have provided strong pressures for speedy deficit reduction.
  • The coalition government plans to cut the deficit faster than Labour intended, largely through public spending cuts, to the general approval of markets and bankers, but with some controversy over the possible impact on economic recovery, and on poorer communities and regions in Britain.