Free Market Of The United Kingdom.

Free Market Of The United Kingdom Economics Essay

The UK economic system is based on the free market system and is one of the most globalised economies in the world. It is a successful country which accepts this system. Although many countries have success in this system, sometimes it is not suitable for developing countries such as China or Thailand. Most countries try to practice the free market trading in order to enhance their economic system and undeniably, this system is an ideology which each country may have to adapt appropriately. Even though capitalism and free trade are currently allowed to operate in UK, the role of government also plays a large role in many economic activities to ensure fairness of exchange transactions.

Free market can be defined as a system which buyers and sellers are responsible for making their choices without regulation by the government. The price mechanism plays an important role in a free market to determine allocation and distribution goods and services. This system has several benefits which both of the producers and consumers satisfy with the price. It seems to be that free market system has a great many advantages but there are a number of arguments which indicate the possible disadvantages. The fundamental characteristic of a free market is that people who can control resources and wealth have privilege to purchase goods and services at high price so the poor are thrown out of the market implicitly. Because of this situation, several ethical problems such as unemployment, crime, and environmental problems increase.

This essay will focus on an analysis of ethics and benefit of the UK free market since 1990. The first section examines the benefits and drawbacks of free market trading. The feature of free market is based on individualism and utilitarianism which form two sides of the argument. Next, the ethical problems caused from free market system will be highlighted. Due to the aspect of freedom, people may do what they want to regardless of reconsideration of society. The last point will analyze the possibility of the UK free market trading in the future and evaluate advantages and disadvantages for developing countries.

1. An analysis of benefits and drawbacks of the free market trading

1.1 Background the UK free market

The free market system was accepted since the eighteenth century in the UK. This system was continuously developed until now so as to obtain maximum benefit. Even though the freedom, which is the basic concept, plays a key role in the UK economic system, practically the government may enter to the market in some sections especially public goods and services. In other words, most decisions in UK are made by the price mechanism in the market and some decisions need to manage by the state such as education, hospital, and public utility. For example, road users have to pay for the road network through the petrol tax system controlled by the UK government (Bearshaw et al., 2001). They also confirmed that the state is responsible for almost 40% of all expenditure in the UK.

1.2 The concept of free market

Individualism is the basic feature of the free market system. It can be defined as the nature, evolution, and function of such institutions in terms of the unplanned and unintended action of free individual agents (Schotter, 1990, p. 6). Buyers can easily purchase any commodities and sellers also produce and distribute whichever products they want to. There are no obstacles put in place by the state to limit the flow of goods and services between trading nations (ibid., p.7).

1.3 The benefits of free market

Based on the concept of individualism, there are three benefits of the free market system. First of all, Schotter (1990) stated that the entrepreneurs can make their own decisions about quantities and what goods should be produced. He also explained that if they produce a product which nobody want to or they produce too much, their profit will be decreased, reducing their income and forcing the production of new different products which the market demands. Secondly, the consumers may have various choices and can choose to buy quality goods. Every entrepreneur wants to produce the products which are sold to many people so there are also many competitors that can produce the same goods or better through the market. Therefore the producer should create distinctive products or produce high quality goods and services in order to increase sales. Lastly, there has been an increase in higher levels of education for graduate employment. Philo and Miller (2001, p.3) stated that The essential individual freedoms were for employers to employ, for workers to be able to sell labor without the restrictions of the trade union and for consumers to be able to buy. The demand for the right to work is therefore converted to workers who have the individuals right to go to work. It is suggested that the workers attempt to enhance their skills so as to satisfy the wage rate because everyone can sell their abilities into the market and the employers are free to hire employees at the lowest possible price. If people have different skills which are required in the market, they will have several opportunities to choose their jobs and request higher salaries.

1.4 The drawbacks of free market

On the other hand, Schotter (1990, p.47) insisted that the very individual rationality that makes the market work so sell often destroys the optimality of its results. The disadvantages can be divided into two parts. Firstly, he argued that people, who have good performance under the existing set of institutions, may have encouragement to work hard in contrast with people who do badly may not be supported. This is due to unequal distribution of income is in the society. Even though in the free market system workers free to supply their abilities, sometimes many skills which each one can do well might not be demanded in the market or many people have the same capability. Secondly, the public goods such as street lighting and public transportation, lack the encouragement from people to pay for them since there is no profit to provide these goods despite the fact that they are important for everybody. Schotter (1990) illustrated that the problem might happen if people think of public goods based on the free trade concept (ibid., p. 58). For example, the street lights should be installed to protect people but there is no one who wants to contribute to them because all people believe that everybody may use them which cannot be specified each person.

2. Identifying the ethical problem caused from the free market system

2.1 The ethical problems

It seems that the free market has several advantages. However, the benefits of this system also lead to ethical problems such as unemployment and environmental problems. Obviously, competition is a characteristic of the free market hence people who cannot compete with others will be easily ignored by the market system. Eventually they may lead to one part of the ethical problems. Two areas of moral problems can be identified.

Firstly, there was an increase in unemployment and poverty in the society. Most entrepreneurs try to reduce costs of their product in order to gain the high profit in the market. Consequently, they attempt to create new innovations such as machine and robot which can help them to manufacture many products in a short time and replace many workers. For example, the self checkout machines, which can be found at many ratailers such as Sainsburys in UK, can replace a lot of staffs. The buyers can make a payment by scanning the barcodes on their own goods to machines. Furthermore, an increase in jobless may be one effect of crime in the society.

Secondly, the environmental problems such as greenhouse effect, air pollution, etc may result from the free market system. Due to the concept of trade without any tariffs or subsidies imposed by the state, every firm produces their products in a way that they expect to obtain the highest profit. Therefore, they do not consider the full costs of pollution (Mankiw, 2001) . Exhaust from automobile creates smog that is breathed by the public, and hence the pollution created by drivers should be included the costs attributed to a company. Bearshaw et al., (2001) also stated that the main industries responsible for a release of carbon dioxide to the air are electricity, gas and transportation. These industries are important for production and distribution in a developed country, and yet have a significant effect on global warming. It is suggested that while the company receives full benefit from the free market trading, the problem of environment will continue to be a problem.

2.2 A case study of carbon footprint emission of two retailers in UK

The Sainsburys and Tesco are currently the leading supermarkets in the UK and they create a vast amount of pollutions that lead to several environmental problems. They produce carbon footprint in many ways such as transportation, their buildings. For instance, refrigeration, which accounts for direct carbon emissions, is necessary for this business because they sell a lot of fresh food. However, they attempt to reduce their carbon footprint by several ways. Sainsburys convinces customers to bring their own bags so as to reduce the numbers of bags which bring about an increase in carbon emissions. This company also use 50% recycled material for producing their bags given to customers (J-Sainsbury's, 2010). In addition, Tesco promoted the campaign Greener living Brand since September 2009 which encouraged the customers to buy products such as energy-saving light bulb which can reduce the global warming. It also launched the website which contains methods of carbon footprint reduction. For example, this website shows ten ways to decrease carbon emissions such as washing clothes at 30 Celsius or lower. It will save around 45 kilograms of carbon dioxide per year. (Tesco, 2010)

3. Way forward for the free market in UK

3.1 An analysis of current UK economic trends

It is difficult to decide whether the UK free market will be maintained over the next hundred years or will be immediately accepted by a new system. However, the UK is a country which successfully practices the free market system, as can be evaluated by the gross domestic product (GDP) . The figure 1 shows that the annual changes in GDP index from 1979 to the first quarter of 2010. Overall, the GDP growth trend remained positive and increased gradually from 2005 to the second quarter of 2008. This implies that after the free market had accepted, the UK economic system developed in the right way. However, the UK GDP growth fell and became negative during the fourth quarter of 2008 until 2009 and turned into positive in early 2010 due to global financial crisis. In this case, the state attempt to cut unnecessary public expenditure so as to reduce fiscal deficit which is the result of the recession in 2009.

GDP growth rate in UK 2005-2009

Figure 1: GDP growth in UK 2005-2009

Source: Office for National Statistics (Statistics, 2010)

Unemployment rate, Q1 1979 to Q1 2010 Quarterly changes in Public Sector Employment, UK

Figure 2 Unemployment rate in UK 1979-2009 Figure 3 Public Sector Employment, UK

Source: Office for National Statistics Labour survey Source: Office for National Statistics Labour survey

Notes: 1. Unemployment rate is for those aged 16 and over

Additionally, the unemployment rate increased sharply from 1979 to 1986 and then decreased until 1990 as can be seen in the figure 2. It was because of the initial free market system that people became jobless. In 1990, there was a rapid increase in unemployment rate due to the contraction in monetary policy aimed at bringing down high inflation until 1993 (Jenkins, 2010). After that, the unemployment rate declined continuously until 2008 and then dramatically rose to 6.9% in the first quarter of 2009. This was due to the global recession which caused demand across the world fell sharply (Jenkins, 2010). However, figure 3 shows that the public sectors increasingly employed the staffs during 2008 to 2009 while the private sectors needed to reduce workforce and froze salaries. The UK government involved in this case in order that the labour market might recover quickly. (ONS, 2010)

3.2 Benefits and drawbacks for developing countries

Undeniably, the UK has a powerful role in the global economy and success of the free market system. However, it may have advantages and disadvantages of this system. If developing countries try to practice this system, they should learn from the UK and adapt the system in conformity with the nature of each country. Thailand is one of developing countries which support the free enterprise system. It learns from several situations in developed countries such as UK and USA. It started to open up the country since the late twentieth century. Thai entrepreneurs have freedom to invest in Thailand or foreign countries and international investors can also open and expand their businesses in Thailand. Thus, there are several benefits which improve Thai economic in a good way. However, it had to face with the Asian financial crisis in 1997 which bring about a dramatic increase in unemployment. It might also have several environmental problems such as air pollution that is caused by many industries. Due to these situations, Thai government may integrate to solve the problems effectively by legislation. For example, in Thailand every factory must control harmful gases which release to the atmosphere by setting up the filterable equipments.

Conclusion

In conclusion, this essay has discussed about the benefits and drawbacks from the market system. It is also identified the ethical problems which come from accepting free market system. Some countries have received a considerable number of benefits from this system. Meanwhile, they might be confronted with several moral problems such as poverty, crime, and environmental problems. Nowadays, most successful countries increasingly become aware of the social problems. For example, many countries should think of global warming that impact on the creatures in the world because of an increase in temperature near the surface of the earth. Moreover, the state of each country should play a key role to control the problems by issuing the policy. The free trading concept is accepted in the UK economic system and it is a successful country. Even though the price mechanism plays an important role in the UK market, some sections may be regulated by the government in order to support social justice.

However, develop countries can apply the free market system from UK. In practice, every country may have to suitably adapt the concept in order to increase economic welfare. This is due to the fact that each country has different characteristic such as population, geography, and history of economic system. Perhaps the free trade might be advantageous for developed countries. This may not mean that every developing country should practice according to them since the free market system has also positive and negative effects. Furthermore, the GDP can measure the growth of each country but it cannot evaluate human happiness. Although some countries have their high GDP index, it cannot imply that everybody who lives there have a sense of well-being and those countries do not have the social problems. Consequently, the economics should grow in parallel with concerns for human welfare.

Reasons for and problems of Black Money

Black money is generated due to the following reasons:

• The people do not pay their taxes. Even if they pay taxes, they are not in correct proportions to their incomes. The tax evasions by corporate and industrial houses are to the tune of billions of rupees. These firms are able to make clever usage of the income tax rules and hence, they save taxes. This tax evasion leads to the generation of black money.

• The black money is earned by gifts, hawala transactions and illegal foreign exchange deals. These deals are not scrutinized by the government simply because these are without any documentary evidences.

• The procedures of over billing or under billing and exaggeration of expenses lead to the generation of black money. The sale and purchase of assets also lead to the generation of black money. The value of the property is shown to be very low in the documents whereas it has a very high value in the actual transaction. The businesses are conducted in other sectors of economy in the same manner and non-billed amounts are retained by the individuals and the firms as black money.

Black money is harming our national economy and we have achieved an economic growth rate of five percent per annum whereas the economy should have grown at the rate of eight percent in order to make up for the rising population pressures and infrastructural development requirements. Black money is the chief inhibiting factor in the process of national economic development.

The menace of black money has also increased the rich poor divide. The poor families are unable to afford even the square meals whereas the rich and the neo-rich are enjoying the luxuries of life. The Indian society has become poorer. Only the few sections of the society, which account for fifteen percent of the total population, have been able to enjoy the highest standards of living in this subcontinent. Therefore, the real poverty has increased and not decreased over a period of fifty years. The black money menace started during the seventies and it is now at its peak and the masses have suffered due to rising prices, inflation in business, poor exports and industrial recession. The rich few, however, have not felt the heat and continue to lead luxurious lives at the cost of their poor countrymen. It has connotation for which you have to exercise care and caution by utilizing your brain for converting a portion of black money or the entire money by converting into white money on a piece meal basis. In this form, you will be able to avoid the rigors of economic measures including taxation.

Black money could be curbed only through the strict efforts of the state and this is for the benefit of the masses as well. We should disclose our real incomes and must pay taxes regularly. We should avoid unhealthy means of making money. The nation must get out of the evil net of black money. Only the honest Indians could save the nation.

Problems of Black Money

Even after 40 years of independence, our country is faced with poverty and numerous economic ills. Even though socialistic pattern of society has been accepted in the constitution, our country is far away from socialism and her economy is in the grip of private enterprises. In fact, India has unlicensed economy which has given birth to corruption, inflation and black money. The concept of mixed economy has been harmful to both private and public enterprises. It has jeopardized our economy and hit the common man below the belt. The poor man has been becoming poorer and rich richer just because of the economic ills like inflation and black money. Black money which runs a parallel currency in wealth which is made overnight in violation of the rules and provisions stipulated by the state and a collusion with the state officials does not go unchecked. This kind of money is earned setting aside all human and moral values.

There are many sources of black money. Chief among these areas follows:

• Import licenses.

• Selling of cement licenses, steel and iron.

• Transactions in heavy industries.

• Transaction in public sector.

• Release of industrial licenses.

• Government and commercial transactions.

• Forged and face currency.

Today the making of black money has become factor in our society because palatial houses, and cars, and in arranging cocktail parties and recreations in big hotels. Moreover, it helps a person getting everything done in time and to his best satisfaction.

There are many causes of converting genuine profit into black money. The chief among them are:

• Inflation.

• General and mid-term election.

• Tax evasion.

The government itself is responsible for the creation of black money. The exorbitant rates of taxation on income, sales, wealth production and revenue inevitably lead to tax-evasion. The taxes on income and wealth are so high that an honest person will be left with little after he pays his due taxes. Many taxes on income and wealth are so high that an honest person will be left are encouraged by the government's taxation policy to look for loopholes in order to refrain from reporting their income. Thus, the money earned as profit remains unaccounted for an unreported and is converted into white money by investing it in big houses, luxury items, gold ornaments, and showy marriages. The government has full knowledge about the quantum of black money which is pumped into our economy every year, but the government measures to check the growth and increase of unaccounted wealth has been ineffective. The missing element has been the will to strike at the root of the evil. That has been the sad story all these years. The customary ritual of declaring war on tax evasion at conferences of income-tax commissioners is faithfully performed every year. The public is told as usual that black money will be unearthed and evaders duly punished. Some operations of the income-tax department get wide popularity. The income-tax officials put themselves on news when the flat of a film star is auctioned or legal action taken against an industrial tycoon. But the problem of black money cannot be solved in this manner.

The political system itself breeds black money. The democratic system which means unlicensed freedom is largely responsible for the growth of corruption and black money. When political parties accept unaccounted money for election campaigns they not only heap generate black money but also protect the hoarders of ill-gotten wealth. It will be a major blow against the parallel economy, if it is made mandatory to audit the books of political parties. Such financing of elections could be also considered. The drive against the parallel economy will never be effective unless the nexus between politics and black money is broken.

The inflationary pressure also threatens our economy and gives birth to black money, which plays a decisive role in inflation and price responsible for inflation and black money. The inflation rate at present is above fifty percent of what has already taken place since twenty years back. In other words, we have become high cost economy with prices averaging fifty percent above what they had been in the country and the lowering of the common man. Unless some strict measures are taken to counter inflation and check high cost economy, the problem of black money cannot be solved. Black money, however, should be dealt with strict application of penal provisions and devaluation of our currency.

Thus, black money is growing unabated and it has become almost a parallel economy. People hoarding black money are trying to convert it into white money and thus causing inflationary pressure and high cost economy. One school of thought is of the view that the parallel economy has come to stay and it need not be disturbed because it plays a useful role. Condemnation of what is illegal goes against the grain of good administration and no government will be justified in pampering black marketers and tax evaders.

PPT ON INCOME ELASTICITY AND CROSS ELASTICITY

PPT ON INCOME ELASTICITY--- BIZED MATERIALS

Reasons for Greece crisis

www.greekcrisis.net/

Greece debt

http://studenttheses.cbs.dk/bitstream/handle/10417/2529/dimitrios_papadimitriou.pdf?sequence=1

8 big issues for the Australian economy in 2014 [Rented article of Craig James is chief economist at CommSec.]

The Australian economy struggled to get out of third gear over much of 2013. But we are hopeful that the economy will finally find fourth gear over the 2014 year.

The main culprit holding back the economy in 2013 was the election. Businesses and consumers simply weren’t prepared to ramp up spending, investment and employment until the election was out of the road. But the economy was also in the transition phase with mining investment topping out while home construction and mining exports were just starting to find their feet.

There were also the budget problems in the US with enforced spending cuts serving to slow economic growth. And China struggled to get past issues in the financial system. But by the end of 2013, growth had picked up in the US and China, and it was looking more promising in Europe.

In line with other forecasters such as the International Monetary Fund, we expect that global economic growth will return to near ”normal” around 3.5 per cent in 2014. One of the main risks is central bank tapering or the winding back of stimulus. Take too long to taper and you risk higher inflation. And if you taper too early you may risk de-railing the economic recovery.

In Australia, we expect that home building and mining exports will pick up the baton from mining construction in 2014 to drive economic growth. And with the election out of the road, home prices rising and a better tone in evidence in the global economy, we expect that consumers will open their wallets a little wider while businesses should respond by lifting hiring and investment. Unemployment could prove reasonably stable with upside risks earlier in 2014 giving way to downside risks as 2014 progresses.

One of the main risks domestically is that the Federal Government is too aggressive in tightening budget spending, rather than relying on stronger economic growth to boost government revenues and thus reduce the size of the budget deficit.

If fiscal or budget policy is too tight, the Reserve Bank may provide some offset by cutting interest rates.

But while there is the risk that the Reserve Bank will cut rates one more time in the first half of 2014, in the second half of 2014 the risk will shift to higher interest rates as economic growth returns to normal.

Turning to the Aussie dollar, over 2013 the currency tracked a US17.5 cent range. For 2014, our currency strategists warn about similar volatility and expect a similar range (to 2013) and should see mid-0.9000s and low 0.8000s trade.

The US ‘taper’

There have been numerous column inches devoted to the US ‘taper’, that is the winding back of monetary stimulus or the ‘tapering’ of bond purchases. Everyone is agreed that the Federal Reserve needs to pull back stimulus at some point; the hard part is in working out when is the ‘right’ time to do it.

As the Reserve Bank Governor counsels, the ‘taper’ will lead to short term volatility on financial markets but the longer-term implications are more positive. Sharemarket investors may fret that the days of cheap money (free money?) are coming to an end, but if the Federal Reserve is toying with the idea of taking the foot off the throttle – even just modestly – that signifies that the economy is doing better. And in a better-performing economy, spending grows and businesses invest and hire staff, and that clearly is positive for revenue and profits

Inflation or deflation?

In many parts of the so-called ‘advanced’ world, interest rates are at or near zero. And in the US, Japan and the UK, central banks have gone further to stimulate economies, buying securities from financial institutions in exchange for cash (quantitative easing). But despite all their efforts, inflation rates in many parts of the western world are lower now than a year ago. One exception is Japan where Prime Minister Abe is determined to get the economy going and end the period of deflation so-called Abenomics. And he has achieved some success with consumer prices up 1.1 per cent on a year ago after falling by 0.4 per cent in 2012.

With more money circulating and chasing fewer goods, the assumption is that inflation will follow. To date, it hasn’t really happened.

If inflation starts creeping higher, it’s a positive development, not negative. It means that economic growth is returning. But it also means that central banks need to be vigilant and make sure that a little inflation doesn’t become a lot, necessitating sharply higher interest rates that could actually choke off economic recoveries.

Housing boom or just a ‘normal’ recovery?

Some commentators are looking at the Sydney housing market and concluding that a boom is underway. And the perception is that, as sure as night follows day, if there is a boom, clearly there follows that there will be a bust.

But interestingly the Reserve Bank isn’t worried about a housing boom – not yet anyhow. Still, it is warning investors not to pay over the top and to realise that property prices can go up as well as go down.

It will also be important to watch trends like the number of people in each home. If household size

continues to increase, then the extra supply could actually lead to a marked softening of home prices.

The rebalancing of China

The new Chinese leadership wants the country to more closely emulate western industrialised nations where household spending plays a greater role in driving economic growth. For instance in the latest national accounts in Australia, household consumption accounted for 55 per cent of the economy (GDP or gross domestic product). In China, the available 2012 data indicated that household spending accounted for almost 36 per cent of the economy with the government sector at 13.5 per cent of GDP; investment at 48 per cent of GDP and net exports at almost 3 per cent of GDP.

If consumer spending grows at a faster rate, then Chinese consumers are more likely to feel that they are benefitting from the expansion of the economy. And in terms of social stability, that is an important factor. Further, there is concern that some provinces may be over-investing in the cities, and those concerns are more likely to be dispelled if growth of retail sales exceeds that of production or fixed asset investment.

The reshaping of Australia

Since 2008 the Australian economy has grown by 14.3 per cent. Of that growth, Mining has contributed 3.2 percentage points (pp) of which iron ore alone has added 2.3pp. But not far behind is Health Care (1.7pp), Professional services (1.6pp) and Construction (1.4pp).

At the other end of the scale, Manufacturing has sliced 0.4pp off growth, while Arts, Agriculture, Transport, Education and Utilities all added nothing to Australia¡¦s economic growth.

So it is clear that Australia has been riding on the back of iron ore (as opposed to riding the sheep back in the 1950s). In the coming year Mining will pull back, but there is plenty of scope for other sectors to grow. In the equivalent five year period before 2008, from 2002-2007, the economy grew 19.8 per cent with Finance (3.1pp), Construction (2.6pp) and Health Care (1.4pp) the main contributors to growth.

The drivers of the Australian economy regularly change and indeed they will again over coming years as the mining construction boom fades and mining exports take over. But clearly other sectors will pick up the slack, with Construction – in particular home construction – the most likely candidate.

Aussie dollar to slip or slump?

Over the past 40 calendar years the Aussie dollar has, on average, tracked a range of US13.7 cents a year or 17.1 per cent. Since the dollar floated the range has been US14.3 cents a year or 18.8 per cent. And over 2013 so far the range has been US17.5 cents or 16.9 per cent. In short, the Aussie dollar is volatile and 2013 has been a year of above-average volatility.

Over 2014 our currency strategists expect a similar trading range, with the Aussie likely holding from the low US80s to the mid US90s. Certainly the Reserve Bank Governor has recently indicated that he thought the Australian dollar should be closer to US85 cents, rather than near US90 cents currently.

Much will depend on the recovery path of the US economy and the extent of tapering undertaken by the Federal Reserve.

Will new conservatism continue?

The conservatism of Australian consumers has been one of the big trends of the past five years. Aussies are saving, not spending. They are more likely to leave money in the bank rather than put money to work elsewhere (although more recently investors have become keen on property again).

Consumers will also shop around for bargains. And it hasn¡¦t just been inherent fiscal conservatism but the internet that has driven this tendency together with a relative firm currency. The internet has allowed consumers to do product comparisons and undertake online shopping – not just in Australia and overseas. Of course the high Aussie dollar has opened the world to shoppers, keeping downward pressure on retail prices and margins here in Australia

If the conservatism continues, then this will mean a continuation or more thoughtful spending and reduced debt levels, meaning that inflation remains under control and interest rates stay lower for longer. Retailers will need to keep costs down, together with margins and they will have to compete harder to improve customer service to lift revenues. Because simply, global competition is here to stay, even if the Aussie dollar eases further.

A new glory era for interest rates?

Over 2013, the cash rate has averaged 2.75 per cent. – the lowest calendar year average since 1959. So while people can debate whether rates are at record lows or not, there is no debate about the last time period that rates have been this low – it was 54 years ago, back in 1959.

If inflation remains under control, there is no fundamental need to lift interest rates markedly. But certainly cash rates are close to zero in many western nations, so it is hoped that rates can rise to at least modest nominal levels to give central banks a degree of flexibility in the future, rather than being forced to rely on the new tools like quantitative easing.

Currently the consensus is that the US federal funds rate won¡¦t rise until perhaps 2015. But longer-term rates are tipped to rise across western nations by between 60-70 basis points over 2014 as global economic growth lifts closer to longer-term averages of around 3.5 per cent. The hard part for central banks will be to get the timing right for lifting policy rates.

Main Problems of UK Economy,What are the main problems of the UK current economy situation?

1. Unemployment
2. Low economic growth
3. Government borrowing
4. External Factors

The main problem facing the UK economy at the present time is persistently high unemployment and stagnant economic growth.

The latest graph for economic growth shows the UK in a double dip recession. There are signs that the UK may recover soon, but since 2008 growth has been way below the long run trend rate of growth, leading to a significant loss in potential output.

Low economic growth adversely affects many different economic problems:

• Demand deficient unemployment. The sharp rise in unemployment since 2008 is due to the slowdown in economic growth.
• Fall in real wages. Stagnant economic growth has contributed to a fall in real wages and lower living standards.
• Increased burden of debt / GDP. With falling GDP, it becomes much more difficult for the government to reduce the burden of government debt to GDP. Despite austerity measures, the debt to GDP ratio is forecast to keep rising.

Unemployment

Unemployment is close to double figures (8.5%) – 2.5 million. The official figures also hide some disguised unemployment, (such as enforced part-time work / early retirement) but, unemployment is still a significant problem.

Unemployment is such a pressing economic problem because:

• Increases relative poverty in the UK. (Unemployment benefits are substantially lower than average wages).
• Unemployment is particularly stressful, causing alienation and reduced living standards.
• Social division. Fortunately, unemployment hasn’t increased to southern European levels. But, the experience of southern Europe shows how society can start to fragment under mass unemployment.
• Budgetary cost. Persistently high unemployment adds to the budget deficit. The government have to spend more on benefits, and they receive lower taxes. If unemployment falls, it will be much easier to tackle the budget deficit.
• more on unemployment

Government Debt

In the short term, government debt is less pressing than the government have claimed. Since 2010, they have given indication that reducing debt levels are the most pressing economic problem. Because of debt, the government have pursued austerity leading to lower growth. I feel the government unnecessarily panicked over debt. Nevertheless, long term spending commitments and long-term debt forecasts are a problem. With an ageing population and perhaps lower growth rates, it could be difficult to finance long-term spending commitments from current tax levels. Debt is a long-term problem rather than short-term.

More on UK debt

4. External Factors

Many of the UK problems are due to domestic factors: low spending, low investment, negative output gap. However, because the UK relies on trade with other countries, especially Europe, external factors are a potential problem. The continued recession and economic uncertainty in the Eurozone is having an adverse impact on UK confidence and UK exports. The concern is that if the Eurozone recession continues to deepen, it could have a large drag on the UK economy – making UK recovery difficult. On the plus side, the US economy shows more promising signs.

Lesser Economic Problems

Inflation

Inflation is currently a relatively minor problem because it has fallen to be within the government’s target. However, with rising energy prices, it could resume its upward trend in the coming months. This cost-push inflation is a problem because with low nominal wage growth, many could see a fall in living standards (causing an increase in fuel poverty). Also, savers may be adversely affected because interest rates are low. more on inflation

Current account deficit

The deterioration in the UK current account is a cause for some concern because it is occurring in a recession. Usually a recession leads to lower imports and an improvement in the current account. This deterioration in the current account suggests the UK could have declining international competitiveness, though it may also be a temporary situation related to Eurozone crisis. More oncurrent account deficit

Lack of Infrastructure Investment

The recession has seen a fall in public sector investment. This threatens long-term productivity issues, such as transport bottlenecks.

As well as infrastructure problems, there are also concerns over other supply side problems, such as inflexible labour markets and lack of vocational skills.

Poor Labour Productivity growth

Some of this poor labour productivity growth can be attributed to the recession. But, if this trend of low productivity growth continues, it will harm the capacity for long-term economic growth.

THE FINANCIAL CRISIS OF 2015

Oliver Wyman Group has released a very interesting piece about the potential for a future financial crisis (thanks to the FT).  They make the case that the next great financial crisis will occur around 2015 and will be the result of a massive bubble in commodity markets that results in widespread economic collapse and sovereign defaults.

I’ve described in recent reports how the financialization of the USA is helping to drive commodity prices higher (see here for more) and generate economic instability.   This, combined with the other two major structural imbalances in the global economy (China’s flawed economic policy and the inherently flawed single currency system in Europe) are creating an environment that is ripe for disequilibrium and turmoil.  The potential for bubbles is not only likely, but now appears like a near certainty.

Wyman describes how the bubble will form in commodities and ultimately collapse:

“Based on favorable demographic trends and continued liberalization, the growth story for emerging markets was accepted by almost everyone. However, much of the economic activity in these markets was buoyed by cheap money being pumped into the system by Western central banks. Commodities prices had acted as a sponge to soak up the excess global money supply, and commodities-rich emerging economies such as Brazil and Russia were the main beneficiaries.

High commodities prices created strong incentives for these emerging economies to launch expensive development projects to dig more commodities out of the ground, creating a massive oversupply of  commodities relative to the demand coming from the real economy. In the same way that over-valued property prices in the US had allowed people to go on debt-fueled spending sprees, the governments of  commodities-rich economies started spending beyond their means.  They fell into the familiar trap of borrowing from foreign investors to finance huge development projects justified by unrealistic valuations. Western banks built up large and concentrated loan exposures in these new and exciting growth markets.

The banking M&A market was turned on its head. Banks pursuing high growth strategies, particularly those focussed on lending to the booming commodities-rich economies, started to attract high market valuations and shareholder praise. In the second half of 2012 some of these banks made successful bids for some of the leading European players that had been cut down to a digestible size by the new anti-“too big to fail” regulations. The market was, once again, rewarding the riskiest strategies. Stakeholders and commentators began pressing risk-averse banks to mimic their bolder rivals.

The narrative driving the global commodities bubble assumed a continuation of the increasing demand from China, which had become the largest commodities importer in the world. Any rumors of a slowing Chinese economy sent tremors through global markets. Much now depended on continued demand growth in China and continued appreciation of commodities prices.”

The bubble bursts
Western central banks pumping cheap money into the financial system was seen by many as having the dual purposes of kick-starting Western economies and pressing China to appreciate its currency. Strict capital controls initially enabled the Chinese authorities to resist pressure on their currency. Yet the dramatic rises in commodities prices resulting from loose Western monetary policies eventually caused rampant inflation in China. China was forced to raise interest rates and appreciate its currency to bring inflation under control. The Western central banks had been granted their wish of an appreciating Chinese currency but with the unwanted side effect of a slowing Chinese economy and the reduction in global demand that came with it.

Once the Chinese economy began to slow, investors quickly realized that the demand for commodities was unsustainable. Combined with the massive oversupply that had built up during the boom, this led to a collapse of commodities prices. Having borrowed to finance expensive development projects, the commodities-rich countries in Latin America and Africa and some of the world’s leading mining companies were suddenly the focus of a new debt crisis. In the same way that the sub-prime crisis led to a plethora of half-completed real estate development projects in the US, Ireland and Spain, the commodities crisis of 2013 left many expensive commodity exploration projects unfinished.

Western banks and insurers did not escape the consequences of the commodities crisis. Some, such as the Spanish banks, had built up direct exposure by financing Latin American development projects. Others, such as US insurers, had amassed indirect exposures through investments in infrastructure funds and bank debt. Inflation pressure in the US and UK during the commodities boom had forced the Bank of England and Fed to push through a series of interest rate hikes that forced many Western debtors that had been holding on since the subprime crisis, to finally to default on their debts. With growth in both developed and emerging markets suppressed, the world once again fell into recession.”

Of course, this scenario is already largely playing out in real-time.  We are seeing investors drive up the prices of commodities as the global economy recovers and speculators look for the next big boom.  Wyman elaborates:

“However, it is already apparent that increasing commodities prices are also creating inflationary pressure in China, which is exacerbated by China holding its currency artificially low by effectively pegging it to the  US dollar. This makes commodities look like an attractive hedge against inflation for Chinese investors. The loose monetary policy in developed markets is similarly making commodities look attractive for Western investors. This “commodities rush” is demonstrated in the right-hand chart below, which shows the asset allocations of European and Asian investors. A recent investor survey by Barclays also found that 76% of investors predicted an even bigger inflow into commodities in 2011.”

Ultimately, they conclude that the imploding commodity bubble will lead to another financial crisis and sovereign defaults.  Their “base case” scenario involves mostly European nations experiencing defaults.  This looks not only likely, but probable.  It is likely that the periphery of Europe will remain mired in recession for several years as austerity measures put downward pressure on their economies and the Euro governments fail to enact a true fix to the flawed single currency system. Persistent weakness in Greece and Ireland will cause continual political turmoil and ultimately the scenes of Egypt would not be surprising throughout many parts of Europe as citizens demand real change.  The Euro would likely remain the primary European currency, however, several periphery nations would reconsider their involvement.

Now, where I disagree with the Wyman analysis is in their “worst case” scenario.  Any regular reader knows that it is highly flawed analysis to conclude that the USA could potentially default on its obligations – all of which are denominated in the currency in which it alone has monopoly supply of.  This simple point eludes even some of the brightest minds in economics today.  A default of the USA is impossible.  The only form of default could come through hyperinflation.  Considering the deflationary collapse that would likely result during the Wyman “worst case” scenario I think it’s likely that we would once again see the USA become the global safehaven and the USD would not collapse, but surge as it did in 2008.  Still, the economic impacts would be deeply negative for the entire global economy though a collapse of the USA is not on the table.

We continue to see increasing disequilibrium in the global economy.  The flaws in the Euro, China’s misguided economic policy and the endless financialization of the USA are the three primary factors contributing to what is unavoidable future calamity.  It’s clear that none of these countries are interested in any sort of near-term pain that would be required to fix these structural imbalances so it’s not a stretch to assume that we will continue the boom/bust cycle that has become a trademark of the last 25 years of global economic growth.  The commodity bubble will merely be a symptom of these imbalances.

Wyman concludes that this event could be several years away, however, I fear that this event could easily occur sooner than 2015.  We remain in one continuing balance sheet recession with rippling waves that could cause these imbalances to resurface sooner than anyone believes.  The resulting impacts will be broad and have the potential to forever change the way we approach future economic growth and the way governments intervene in markets.  I would expect the Bernanke Fed to be in the middle of the ensuing storm.  Such a crisis would likely result in wide ranging policy changes that will finally clear the imbalances of the credit crisis and create a foundation for truly sustainable economic prosperity.

What is Public Expenditure ? Meaning, Definition

What is Public Expenditure ? Meaning, Definition

Public expenditure refers to Government expenditure i.e. Government spending. It is incurred by Central, State and Local governments of a country.

Public expenditure can be defined as, "The expenditure incurred by public authorities like central, state and local governments to satisfy the collective social wants of the people is known as public expenditure."

Throughout the 19^th Century, most governments followed laissez faire economic policies & their functions were only restricted to defending aggression & maintaining law & order. The size of pubic expenditure was very small.

But now the expenditure of governments all over has significantly increased. In the early 20^th Century, John Maynard Keynes advocated the role of public expenditure in determination of level of income and its distribution.

In developing countries, public expenditure policy not only accelerates economic growth & promotes employment opportunities but also plays a useful role in reducing poverty and inequalities in income distribution.

Classification of Public Expenditure

Classification of Public expenditure refers to the systematic arrangement of different items on which the government incurs expenditure.

Different economists have looked at public expenditure from different point of view. The following classification is a based on these different views.

1. Functional Classification

Some economists classify public expenditure on the basis of functions for which they are incurred. The government performs various functions like defence, social welfare, agriculture, infrastructure and industrial development. The expenditure incurred on such functions fall under this classification. These functions are further divided into subsidiary functions. This kind of classification provides a clear idea about how the public funds are spent.

2. Revenue and Capital Expenditure

Revenue expenditure are current or consumption expenditures incurred on civil administration, defence forces, public health and education, maintenance of government machinery. This type of expenditure is of recurring type which is incurred year after year.

On the other hand, capital expenditures are incurred on building durable assets, like highways, multipurpose dams, irrigation projects, buying machinery and equipment. They are non recurring type of expenditures in the form of capital investments. Such expenditures are expected to improve the productive capacity of the economy.

3. Transfer and Non-Transfer Expenditure

A.C. Pigou, the British economist has classified public expenditure as :-

1.     Transfer expenditure

2.     Non-transfer expenditure

Transfer Expenditure :-

Transfer expenditure relates to the expenditure against which there is no corresponding return.

Such expenditure includes public expenditure on :-

1.     National Old Age Pension Schemes,

2.     Interest payments,

3.     Subsidies,

4.     Unemployment allowances,

5.     Welfare benefits to weaker sections, etc.

By incurring such expenditure, the government does not get anything in return, but it adds to the welfare of the people, especially belong to the weaker sections of the society. Such expenditure basically results in redistribution of money incomes within the society.

Non-Transfer Expenditure :-

The non-transfer expenditure relates to expenditure which results in creation of income or output.

The non-transfer expenditure includes development as well as non-development expenditure that results in creation of output directly or indirectly.

1.     Economic infrastructure such as power, transport, irrigation, etc.

2.     Social infrastructure such as education, health and family welfare.

3.     Internal law and order and defence.

4.     Public administration, etc.

By incurring such expenditure, the government creates a healthy conditions or environment for economic activities. Due to economic growth, the government may be able to generate income in form of duties and taxes.

4.1 Productive and Unproductive Expenditure

This classification was made by Classical economists on the basis of creation of productive capacity.

Productive Expenditure :-

Expenditure on infrastructure development, public enterprises or development of agriculture increase productive capacity in the economy and bring income to the government. Thus they are classified as productive expenditure.

Unproductive Expenditure :-

Expenditures in the nature of consumption such as defence, interest payments, expenditure on law and order, public administration, do not create any productive asset which can bring income or returns to the government. Such expenses are classified as unproductive expenditures.

4.2 Development and Non-Development Expenditure

Modern economists have modified this classification into distinction between development and non-development expenditures.

Development Expenditure :-

All expenditures that promote economic growth and development are termed as development expenditure. These are the same as productive expenditure.

Non-Development Expenditure :-

Unproductive expenditures are termed as non development expenditures.

5. Grants and Purchase Price

This classification has been suggested by economist Hugh Dalton.

Grants :-

Grants are those payments made by a public authority for which their may not be any quid-pro-quo, i.e., there will be no receipt of goods or services. For example, old age pension, unemployment benefits, subsidies, social insurance, etc. Grants are transfer expenditures.

Purchase prices :-

Purchase prices are expenditures for which the government receives goods and services in return. For example, salaries and wages to government employees and purchase of consumption and capital goods.

6. Classification According to Benefits

Public expenditure can be classified on the basis of benefits they confer on different groups of people.

1.     Common benefits to all : Expenditures that confer common benefits on all the people. For example, expenditure on education, public health, transport, defence, law and order, general administration.

2.     Special benefits to all : Expenditures that confer special benefits on all. For example, administration of justice, social security measures, community welfare.

3.     Special benefits to some : Expenditures that confer direct special benefits on certain people and also add to general welfare. For example, old age pension, subsidies to weaker section, unemployment benefits.

7. Hugh Dalton's Classification of Public Expenditure

Hugh Dalton has classified public expenditure as follows :-

1.     Expenditures on political executives : i.e. maintenance of ceremonial heads of state, like the president.

2.     Administrative expenditure : to maintain the general administration of the country, like government departments and offices.

3.     Security expenditure : to maintain armed forces and the police forces.

4.     Expenditure on administration of justice : include maintenance of courts, judges, public prosecutors.

5.     Developmental expenditures : to promote growth and development of the economy, like expenditure on infrastructure, irrigation, etc.

6.     Social expenditures : on public health, community welfare, social security, etc.

7.     Pubic debt charges : include payment of interest and repayment of principle amount.

courses of action in terms of the merits of protection