The paper should be at least 700 words paper.
1. Summarize all the information you got from reading the article. Explain in detail all economic situations from 1800’s till the David Cameron presidency era. Do not forget to include the birth of the Keynesian concept. (at least 500 words)
2. Explain in detail what David Cameron has to do to improve the economic situation in the UK. What else should David Cameron’s government do to put the country on a sustained and balanced growth trajectory? (at least 200 words)
Do not use other sources other than this article. Just based on your analysis and arguments
The United Kingdom and the Means to Prosperity
If our poverty were due to famine or earthquake or war or if we lacked material things and the resources to produce them, we could not expect to find the means to prosperity except in hard work, abstinence and invention. In fact, our predicament is notoriously of another kind.
— John Maynard Keynes, The Means to Prosperity, 1933
On May 7, 2015, David Cameron was elected to a second term as the prime minister of the United
Kingdom, following a decisive election victory by the Conservative Party.1 Prior to Cameron’s tenure, the U.K. was hit hard by the global financial crisis of 2007–2008, resulting in bank runs, several nationalizations, and government bailouts. Moreover, government debt was growing at a high pace. In 2007, public debt measured 42% of GDP; by 2010, it had doubled to nearly 80%.2 When Cameron first took office in May 2010 as the head of Conservative-Liberal Democrat coalition, he believed there was a need for dramatic fiscal reform, and the Cameron government introduced a £40 billion austerity plan in 2010, intensifying the £73 billion in cuts announced earlier by the Labour Party.
After growing an average of only 1.2% from 2010–2013, the U.K. economy experienced a significant recovery in 2014, with growth at 2.8%, the highest in the past seven years (see Exhibit 1).3 What was driving this recovery? Was it because—or in spite—of Cameron’s controversial austerity policies? Some commentators argued that the recovery had proved austerity to be a success, laying “the foundations for sustainable growth,” as Chancellor of the Exchequer George Osborne asserted. Others believed the downturn had been unduly prolonged due to the spending cuts. Economist Paul Krugman asked, “If I keep hitting myself in the head with a baseball bat, and then I stop, I will start
to feel better; this doesn’t mean that hitting yourself in the head with a baseball bat is a good thing.”4
Despite the encouraging return to growth, it remained to be seen whether the recovery would last, and many worried about the risk of secular stagnation, a stall in economic growth caused by a structural deficiency in demand. Additionally, growth was primarily seen within the services sector, particularly the financial industry. Income inequality was rising swiftly, and many worried whether the U.K. was caught in a housing bubble; prices had nearly doubled since 2000.5 In the run-up to the election, inflation remained near zero despite the 2% target, while productivity growth stood at its lowest since World War II.6 When he began his second term, Cameron wondered, had the U.K. fully escaped its longest recession? What challenges remained ahead?
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Economic Policy in the U.K. over the Twentieth Century
The U.K. was the world’s most prominent imperial and industrial power from the early seventeenth to the late nineteenth century. As the birthplace of the industrial revolution in the eighteenth century, Great Britain quickly transformed into the leading manufacturer of textiles, using its global expanse of colonial holdings as markets for its manufactured goods. Throughout the nineteenth century, Britain furthered its position by developing new industries, such as iron, steel, and railway technologies. However, by the late nineteenth century, British steel production began to lag. By 1890, with rapid growth in industrialization elsewhere, the U.S. overtook Great Britain as the largest global manufacturer.7
Great Britain’s economy struggled during World War I as manufacturing capacity was reallocated toward munitions to support the war effort. Following the outbreak of war, as nations struggled to finance military expenditures, the monetary system of fixing the value of the currency in terms of
gold, known as the gold standard, broke down.8 Throughout the 1920s, Great Britain battled stagnation as a result of the high costs of World War I. In 1925, the U.K. government decided to return to the gold standard, ignoring the need for real depreciation, and fixed the pound at parity to the prewar price.9 Considered the father of macroeconomics, John Maynard Keynes opposed the
reinstitution, describing the gold standard as a “barbarous relic.”10 Decrying the deflationary effect of the gold standard, Keynes argued that expansionary policies were needed to combat stagnation.
The Great Depression and the Birth of Keynesian Macroeconomics
In 1929, the U.S. stock market crashed, ushering in the Great Depression. By 1931, the value of British exports had halved, and unemployment surpassed 16%.11 Financial upheaval firmly entrenched Europe, including banking crises in Germany and Austria, and investors demanded the exchange of pound sterling for gold. By September, speculators had depleted the Bank of England’s gold reserves, and the nation was forced to leave the gold standard, resulting in a currency devaluation of 25%.
In 1933, in the midst of the Great Depression, economist John Maynard Keynes published his seminal work The Means to Prosperity, which would transform how governments conceptualized market intervention through fiscal policy. Prior to the Depression, governments believed that large fluctuations in the growth of output and income were normal and self-correcting. Keynes argued that poverty was not due to unfortunate circumstances or a lack of resources. Keynes’s diagnosis of the Great Depression was as follows:
It comes from some failure in the immaterial devices of the mind, in the working of the motives which should lead to the decisions and acts of will, necessary to put in movement the resources and technical means we already have. It is as though two motor-drivers, meeting in the middle of a highway, were unable to pass one another because neither knows the rules of the road. Their own muscles are no use; a motor engineer cannot help them; a better road will not serve. Nothing is required and nothing will avail, except a little clear thinking. . . . It is in the strictest sense, an economic problem.12
Keynes then argued for direct government intervention through expansionary fiscal policy to stimulate aggregate demand. He presented his argument for a “fiscal multiplier” as follows:
It is often said that it costs £500 capital expenditure on public works to give one man employment for a year. This is based on the amount of labour directly employed on the
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spot. But it is easy to see that the materials used and the transport required also give employment. If we allow for this, as we should, the capital expenditure per man-year of additional employment is usually estimated, in the case of building for example, at £200.
But if the new expenditure is additional and not merely in substitution for other expenditure, the increase of employment does not stop there. The additional wages and other incomes paid out are spent on additional purchases, which in turn lead to further employment. If the resources of the country were already fully employed, these additional purchases would be mainly reflected in higher prices and increased imports. But in present circumstances this would be true of only a small proportion of the additional consumption, since the greater part of it could be provided without much change of price by home resources which are at present unemployed. Moreover, in so far as the increased demand for food, resulting from the increased purchasing power of the working classes, served either to raise the prices or to increase the sales of the output of primary producers at home and abroad, we should to-day positively welcome it. It would be much better to raise the price of farm products by increasing the demand for them than by artificially restricting their supply.
Nor have we yet reached the end. The newly employed who supply the increased purchases of those employed on the new capital works will, in their turn, spend more, thus adding to the employment of others; and so on. Some enthusiasts, perceiving the fact of these repercussions, have greatly exaggerated the total result, and have even supposed that the amount of new employment thus created is only limited by the necessary intervals between the receipt of expenditure of income, in other words by the velocity of circulation of money. Unfortunately it is not quite as good as that. For at each stage there is, so to speak, a certain proportion of leakage. At each stage a certain proportion of the increased income is not passed on in increased employment. Some part will be saved by the recipients; some part raises prices and so diminishes consumption elsewhere, except in so far as producers spend their increased profits; some part will be spent on imports; some part is merely a substitution for expenditure previously made out of the dole or private charity or personal savings; and some part may reach the Exchequer without relieving the taxpayer to an equal extent. Thus in order to sum the net effect on employment of the series of repercussions, it is necessary to make reasonable assumptions as to the proportion lost in each of these ways. . . .
It is obvious that the appropriate assumptions vary greatly according to circumstances. If there were little or no margin of unemployed resources, then, as I have said above, the increased expenditure would largely waste itself in higher prices and increased imports (which is, indeed, a regular feature of the later stages of a boom in new construction). If the dole was as great as a man’s earnings when in work and was paid for by borrowing, there would be scarcely any repercussions at all. On the other hand, now that the dole is paid for by taxes and not by borrowing (so that a reduction in the dole may be expected to increase the spending power of the taxpayer), we no longer have to make so large a deduction on this head.
My own estimate, taking very conservative figures in the light of present circumstances, makes the multiplier to be at least 2.13
In 1939, World War II broke out in Europe, and Keynes soon became the “principal architect of World War II fiscal policy.”14 In a 1940 publication called How to Pay for the War, Keynes argued that the war should be financed through higher taxation toward the wealthy rather than deficit spending,
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the U.K.’s traditional means for funding a war. Adam Smith, considered to be the founder of the field of economics and hailing from Scotland, had also encouraged taxing the wealthy: “It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their
revenue, but something more than in that proportion.”15 For the first time during World War II, the government issued higher taxes on capital income as a means to fund military expenditures. By the 1940s, Keynes’s economic ideas dominated U.K. politics.
Post-War Consensus and the Growth of Government
During World War II, Great Britain was characterized by strong government intervention in economic matters. With fresh memories of the mass unemployment during the Great Depression, the British public held a broad interest in extending government control to include a comprehensive social welfare system. In 1942, the Beveridge Report was presented to Parliament, recommending sweeping social reform in order to abolish “want” from Britain.
In the 1945 elections, the Labour Party won a majority in Parliament for the first time. Prime Minister Clement Attlee ran on the main goal of achieving full employment and economic growth by applying Keynesian macroeconomic principles. After World War II until the 1970s, deficit spending became the preferred tool of the British government to combat economic downturns. From 1948 until 1970, the economy grew fourfold, and unemployment remained low (see Exhibit 2). Attlee also instituted many of the policies recommended by the Beveridge Report, including universal education, the provision of universal health care through the National Health Service, housing subsidies, and guaranteed insurance for unemployment. Between 1945 and 1951, the government nationalized more than one-fifth of Britain’s economy, including sectors such as iron and steel,
telecommunications, gas and electricity utilities, coal, railways, and airlines.16
Between 1951 and 1971, the British economy experienced four “stop-go” cycles, characterized by expansionary polices followed by abrupt reversals (see Exhibit 3). In 1944, the British pound was fixed to the U.S. dollar under the Bretton Woods system. During periods of higher unemployment, the government adopted expansionary fiscal policies, such as tax cuts and increased public expenditures. Yet higher demand meant a simultaneous increase in imports, driving a current account deficit and inflation, which led to a further increase in wages. Limited by a fixed exchange rate, inflexible prices, and a finite stock of dollar reserves, the government then chose to reverse its expansionary policies rather than devalue the exchange rate.17
Many blamed labor relations for the “stop-go” effect. By 1950, more than 45% of British workers were represented by unions, no votes were required prior to strikes, and the picketing of an
establishment not directly involved in the dispute, known as secondary picketing, was allowed.18 The Trades Union Congress (TUC) was the most important entity, representing the interests of many individual unions. The trade union movement had founded the Labour Party in 1900, and the TUC continued to act as a major financial donor for the party over the twentieth century.
By the 1960s, it was evident that industrial relations were proving problematic. In order to balance full employment with inflation, wage moderation needed to be consistent with price stability. In 1962, the Conservative government founded the National Economic Development Council (NEDC), a board designed to direct national planning to revitalize manufacturing and limit inflation through controlled wage growth. The board included representatives from government, business, and the TUC. The simultaneous goals of controlled inflation and revitalization, however, proved incompatible. The Conservatives aimed to use the NEDC as a means to limit wage growth, while the Labour Party strengthened the NEDC’s role in industrial planning.
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By the end of the 1960s, economic growth began to slow again, and the government worried as inflation and the external deficit reached alarming levels. In 1966, Labour prime minister Harold Wilson introduced an austerity plan featuring budget cuts and widespread wage freezes, policies that were met with strikes, ultimately quelled through sizable wage concessions. In 1967, the government devalued the pound by 14%, as allowed within the Bretton Woods system of fixed exchange rates.
A Strained Consensus
Between 1968 and 1971, Britain was hit with high inflation; food prices rose by 32%, while general services rose by 37% (see Exhibit 4).19 Dissatisfied with the Labour Administration, Britons elected Conservative prime minister Edward Heath in 1970. The Heath administration tightened monetary and fiscal policy, while liberalizing the financial markets by allowing market-established interest rates. Despite opposition from the Labour Party, Britain joined the European Economic Community. Believing excessive wage demands of the trade unions drove inflation, the Heath administration also passed the Industrial Relations Act, which required unions to register with the government, provide financial disclosures, and win a majority vote from members before initiating a strike.
Throughout the early 1970s, the British economy was jolted through several external shocks. In 1971, the Bretton Woods system was abolished and Britain adopted a floating exchange rate. From 1973–1974, oil prices quadrupled and inflation reached 25%.20 Heath’s tight macroeconomic policies strained British firms through reduced domestic demand, and unemployment reached 1 million. In 1971, the car manufacturer Rolls-Royce declared bankruptcy, and Heath was forced to take a U-turn back to consensus for greater state involvement and provided a bailout to the firm. In reaction to the state’s wage restraint policy under the Industrial Relations Act, the most militant trade union in Britain, the National Union of Mineworkers (NUM), declared a 12-week strike in 1974. Widespread power outages became common, forcing the government to declare Britain in a state of emergency and impose a three-day workweek. Three months after declaring a state of emergency, the Conservatives lost to the Labour Party in the national election. The new administration placated the miners with a 27% raise, more than their original demand.
In 1976, Labour chancellor James Callaghan became prime minister, inheriting the current account deficit and a rapidly depreciating pound. Speculators targeted the pound, losing confidence that Britain could curb its stubborn inflation, and the Callaghan government was forced to approach the International Monetary Fund (IMF) for a loan. In return, the IMF required Britain to institute a strict austerity program and a wage ceiling. At a Labour Party Conference, Callaghan explained:
We used to think that you could spend your way out of a recession, and increase employment by cutting taxes and boosting Government spending. I will tell you in all candor that option no longer exists. . . . We have just escaped from the highest rate of inflation this country has known; we have not yet escaped from the consequences: high
unemployment. That is the history of the last 20 years.21
Over the remainder of Callaghan’s term, relations with the trade unions grew more tenuous. In the winter of 1978–1979, public sector unions went on strike, including grave diggers and waste collectors, demanding an end to the voluntary wage controls. Memories of the chaos, known as the “Winter of Discontent,” tainted public opinion of the Labour Party.
Thatcher vs. Keynesian Consensus
In the 1979 election, the Conservatives won a landslide victory. The new prime minister, Margaret Thatcher, nicknamed the “Iron Lady,” distanced herself from the post-war consensus, saying, “I am
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not a consensus politician. I am a conviction politician.”22 Thatcher’s primary goals were to restore Britain as a global economic leader and spur economic growth through market forces rather than government intervention.
The Thatcher government’s plan began by instituting strict monetarism and a tight fiscal policy. Discarding Keynesian economics, Thatcher commented, “Pennies don’t fall from heaven—they have
to be earned here on earth.”23 Although monetarism was largely untested, Thatcher’s government set a target for monetary growth. To reduce government spending, Thatcher cut employment in the civil service and capped wage increases. Thatcher’s administration also introduced a substantial tax adjustment to increase investment. The top tax rate was reduced from 83% to 60%, while the basic
rate dropped from 33% to 30%.24 By more than doubling the value-added tax (VAT), the Thatcher government achieved an overall increase in revenue.
The new policies, however, had a tenuous beginning. Due to the VAT increase and the second international oil shock, inflation measured 20% by 1980. To meet its money supply growth target, the Bank of England raised interest rates to 17%, which in turn caused the pound to appreciate rapidly (see Exhibit 5). The economy slid into the worst recession since the Great Depression. However, much of Thatcher’s lost popularity was regained when the U.K. won a military victory against Argentina to reclaim the disputed Falkland Islands in 1982. Thatcher and the Conservative Party were reelected for a second term in 1983.
Thatcher was a strong proponent of economic liberalism, declaring, “There is no alternative.”25 The Thatcher administration introduced many structural reforms, including deregulation and privatization of many industries, including airlines, steel, gas, oil, and telecommunications. Believing that her predecessor’s failures were the direct result of labor union demands, Thatcher took on the trade unions by abolishing the NECD, effectively eliminating the direct voice of unions in government decisions, and imposing direct regulations, such as requiring secret ballots for votes on strikes, outlawing secondary picketing, and making union members financially liable for the economic consequences of strikes. In 1984, Thatcher took on the NUM when she privatized the coal industry. For months, the government silently stockpiled coal and trained special police forces in anticipation of social unrest upon announcing the plan for privatization. The miners responded with a strike that lasted one year. Thousands of NUM members were arrested, and the strike cost the government £5 billion. During her government, trade union membership halved to 30% of British
workers.26 Some accused Thatcher of weakening the shipbuilding, steel, and other manufacturing industries during her tenure, an impact disproportionately felt by Scotland.
Thatcher also targeted the welfare state during her tenure. Since World War II, the cost of welfare benefits had increased five times faster than prices.27 Prior to her election, Thatcher distanced herself from the previous government’s liberal social spending: “[Socialist governments] always run out of other peoples’ money,” she said in a 1976 interview.28 However, unwilling to risk political fallout by cutting popular programs, such as the National Health Service and old-age pensions, the Thatcher government reduced spending by putting ceilings on aid distributed by local government agencies, halved funds for public housing, and cut individual benefits for unemployment and child support. However, due to the recession of the early 1980s, overall social welfare spending increased during Thatcher’s tenure, despite reduced benefits.
By 1983, the British economy took a dramatic turn. Inflation fell to 5%, the lowest rate in 15 years. As a result, interest rates were lowered and the pound depreciated, fueling a domestic consumption boom. The Thatcher government won an unprecedented third term in office in 1987, when Britain’s economic growth rate was the highest in Europe.
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In 1990, the U.K. joined the European Exchange Rate Mechanism (ERM), under which the pound was fixed to the deutsche mark. By 1992, the U.K. was forced to withdraw from the ERM after a
speculative attack on the pound.29 Despite inheriting the embarrassing ERM debacle, the Conservative Party was elected to a fourth term in office under the leadership of Prime Minister John Major. During his tenure, Major opted out of the single currency and the Social Chapter of the EU’s Maastricht Treaty, which he believed would undo the reforms introduced under Thatcher.
Throughout the 1990s, however, Conservative leadership experienced a rapid decline in popularity as the party faced issues of corruption and sex scandals. Moreover, many were displeased over the rapid increase in inequality during Thatcher’s term. From 1978 to 1990, the Gini index, a
measure of a nation’s inequality, rose from 26.6 to 36.8.30
Birth of the “New Labour” Party
In 1997, the Labour Party reclaimed office, benefitting from the Conservative Party’s drop in popularity. In preparation for the elections, the party reconceptualized itself as “New Labour” and disassociated from the nation’s trade unions. Labour leaders reduced the TUC’s block vote from 70% to 50% and amended the section of the party’s constitution pledging support to the public ownership of Britain’s means of production. In the lead-up to the election, party leader Tony Blair vowed to not govern for any vested interest, in an attempt to position his party as one more friendly to business. During his tenure, the Blair administration instituted one of Labour’s flagship policies, the minimum wage. However, Blair largely left Thatcher’s anti–trade union legislation intact.
One of Blair’s main policies was to grant independence to the central bank. Control over interest rates was transferred from the Treasury to the Bank of England, which had a strict mandate of
meeting the government’s inflation target, set at 2.5%.31 If the inflation failed to meet the set target, the governor of the Bank of England was required to report to the chancellor, explaining why the target was missed, and set concrete steps to correct the imbalance. The early years of the Bank of England’s independence were marked by remarkable price stability, and the Bank successfully met its target from 1998 to early 2007. By 2004, unemployment dropped to an unprecedented 4.8%, while economic growth averaged 3.3% over Blair’s tenure.
In June 2007, Blair stepped down, and Chancellor of the Exchequer Gordon Brown became the new prime minister. As chancellor under Blair, Brown had a strong record of managing the economy. Soon into his tenure, however, Brown faced the challenge of navigating the global financial crisis.
The U.K.’s Financial System and the Global Financial Crisis
Over the previous two decades, changes in regulation had transformed the U.K. into a global financial center (see Exhibit 6). In 1980, the banking sector had assets measuring just £128 billion, or
55% of GDP.32 Historically, only U.K. banks were allowed to deal in foreign exchange, and in 1979 exchange controls were lifted, allowing a free flow of capital to increase British firms’ access to affordable funding. In 1986, Thatcher’s “Big Bang” transformed U.K.’s financial industry by targeting centuries-old regulations that hindered the growth. Principally, the “Big Bang” ended single capacity, which prevented a stockbroker from acting both as an agent and a moneymaker, and fixed the minimum commission charged by brokers.33 As the U.K. financial industry became increasingly competitive, many international firms, primarily U.S. investment banks, joined the market.
The second major regulatory change occurred in 1997 when the Blair administration announced the independence of the Bank of England and the creation of a single financial regulator. The newly
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created Financial Services Authority (FSA) had two responsibilities, banking supervision and regulation of investment services. The Bank of England remained responsible for overseeing the financial system in general. By 2000, the financial services industry had grown to £1,400 billion, or
143% of GDP.34 The former chief executive Hector Sants described the regulators’ historical “light- touch regulation” approach as retrospective regulation. He explained, “The underlying principle of
the ‘old-style’ FSA was that it would not intervene until something went wrong.”35
In late 2007, the swiftly growing financial services industry began to feel the delayed effects of the U.S. housing bubble collapse. In September, the Northern Rock Building Society asked for emergency financial support from the Bank of England, initiating the first bank run since 1866.36 Northern Rock’s business model depended on securitized mortgages, under which the building society borrowed from international money markets in order to extend mortgages to U.K. customers and then resell them on international capital markets. However, the U.S. housing bubble quelled demand for securitized mortgages, leaving Northern Rock without the funds to repay its loans. On September 14, 2007, Northern Rock received emergency liquidity support from the Bank of England. While the Bank of England, the Treasury, and the FSA jointly affirmed that the building society could “fund its operations during the current period of turbulence,” customers pulled an estimated £1 billion in
deposits.37 Northern Rock’s deposit insurance only covered 100% of investments up to £2,000 and 90% of amounts up to £33,000, fueling customers’ concerns over the safety of their deposits.38 To stop the bank run, the Bank of England agreed to guarantee all deposits held by Northern Rock. In February 2008, Northern Rock was nationalized, transferring £113 billion in liabilities to the Treasury.
The nationalization boosted the nation’s debt burden above the 40% of GDP threshold.39
By the second quarter of 2008, the U.K. entered a recession that would become the longest in the country’s history (see Exhibit 7). In September 2008, the government announced the nationalization of a second building society, Bradford and Bingley, and on October 6, the Financial Times Stock Exchange (FTSE) 100, an index of the top 100 firms by market capitalization on the London Stock Exchange, had its biggest single-day fall since 1987. Less than 48 hours later, the Brown government announced its bank rescue package, which offered a guarantee of £250 billion to help debt refinancing, a doubling of the Bank of England’s special liquidity lending capacity to £200 billion, and £50 billion for banks to increase their market capitalization.40 Five days later, the government announced a £37 billion bailout for some of the U.K.’s largest banks, including the Royal Bank of Scotland, HBOS, and Lloyds TSB, in order to prevent the collapse of the nation’s banking system.
In the aftermath of the crisis, many blamed the FSA for mishandling the Northern Rock nationalization and failing to predict the systemwide instability. Former Prime Minister Brown reflected, “We set up the FSA believing the problem would come from the failure of an individual
institution. That was the big mistake . . . . We didn’t understand just how entangled things were.”41 George Osborne similarly explained, “The FSA became a narrow regulator, almost entirely focused on rules-based regulation . . . . No one was controlling levels of debt and when the crunch came no one knew who was in charge.”42 On June 16, 2010, Osborne announced the abolition of the FSA, splitting its responsibilities among several new agencies. In its place, the Consumer Protection and Markets Authority was in charge of regulating the behavior of individual financial institutions and relaying information to the Financial Policy Committee, which monitored the heath of the financial system as a whole. Both authorities were subsidiaries of the Bank of England.
Monetary Policy Response and Quantitative Easing
In an attempt to stabilize financial markets following the collapse of Lehman Brothers, the U.S. Federal Reserve announced an asset-buying program in November 2008, while Japan intensified its
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own programs.43 Initially hesitant about adopting an expansionary monetary policy, the U.K. Treasury announced in January 2009 the creation of an Asset Purchase Facility to be placed under the
authority of the Bank of England.44 The Bank was authorized to buy up to £50 billion in “high quality private sector assets,” selling short-term gilts, bonds issued by the British government and generally considered low risk, to finance the program, whereby not impacting the Bank’s total liabilities.45
As inflation remained low, the Bank of England dropped interest rates to a record 0.5%, the lowest in the Bank’s history. Governor Mervyn King warned that “further rate cuts in the Bank Rate alone might not be enough to bring inflation in line” with the target of 2%, and the Bank of England announced the launch of a £75 billion quantitative easing (QE) program on March 5, 2009. The Bank of England maintained, “The objective of Quantitative Easing is to boost the money supply through large-scale asset purchases and, in doing so, to bring about a level of nominal demand consistent with
meeting the inflation target in the medium term.”46 By November, the program had been expanded
twice more, authorizing the Bank of England to cumulatively purchase up to £200 billion in assets.47
By the end of 2010, quantitative easing slowed as economic conditions improved. On October 6, 2011, the Bank of England reextended its program to £275 billion, following concerns of missing the inflation target. The QE target was further raised to £325 billion in February 2012 and to £375 billion in July 2012. Overall, the U.K.’s QE program amounted to 26.3% of GDP, surpassing the U.S.’s program size of 22.1% of GDP. 48
The 2010 Election
Leader of the Conservative Party since 2005, David Cameron had an affluent background, attending the prestigious boarding school Eton College and Oxford University. Elected to Parliament in 2001, Cameron swiftly gained prominence, serving as the shadow deputy leader of the House, campaign coordinator for the 2005 election, and the shadow education secretary.
In the run-up to the 2010 election, Cameron introduced the Conservative Party’s flagship policy, known as the “Big Society.” In 2009, as unemployment reached 7.6% and the economy shrank by 5.8%, Cameron contended that the British economy was struggling “because government got too big, spent too much and doubled the national debt” and vowed to address the growing deficit if elected
to office.49 The plan aimed to decentralize and localize the power of the state through the introduction of free schools, elected police officials, and a reduction in the civil service. Additionally, Cameron argued that big government had undermined personal responsibility, and the benefits system needed to be overhauled. Cameron pledged to eliminate tax credits for families earning over £50,000 and reduce spending on the Child Trust Funds, a tax-free savings account for children.
As the 2010 general election approached, the U.K.’s three main political parties agreed the mounting fiscal deficit needed to be addressed. The Conservatives argued that curbing the deficit immediately was critical to preventing further economic downturn. The Labour Party and the Liberal Democrats, however, proposed that spending cuts and tax increases should be delayed until at least 2011, in order to give the economy more time to recover. Nick Clegg, the leader of the Liberal Democrats, commented, “My eight-year-old [son] ought to be able to work this out—you shouldn’t
start slamming on the brakes when the economy is barely growing.”50 This echoed Keynes’s famous dictum “The boom, not the slump, is the time for austerity.”51
The Conservative Party won 306 seats in the elections held in May 2010, falling 20 seats short of forming a majority. Five days later, the Conservative Party joined the Liberal Democrats to form the first coalition government since World War II. At age 43, Cameron was the youngest prime minister
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since the Earl of Liverpool in 1812. He faced the immediate challenge of reconciling the two parties’ divergent views on the most appropriate timeline for U.K.’s debt reduction strategy.
The Coalition’s Economic Policies
Today’s the day when Britain steps back from the brink.52
—Chancellor George Osborne, October 20, 2010
On June 22, 2010, Chancellor George Osborne unveiled the Conservative–Liberal Democrat coalition’s first budget. Nicknamed the “Emergency Budget,” the fiscal plan aimed to immediately begin eliminating the U.K.’s growing level of national debt. Public finances stood in disarray (see Exhibits 8–10); the U.K. had a budget deficit amounting to 10% of 2010–2011 GDP. Moreover, from 1980 to 2007, public debt averaged 44% of GDP. By 2010, it had doubled to nearly 80%. Policymakers worried whether investors would continue to hold on to U.K. debt if the deficit continued to creep higher. Speaking in front of Parliament on October 20, 2010, Chancellor Osborne announced, “Tackling the budget deficit is unavoidable. . . . To back down now and abandon our plans would be
the road to economic ruin.”53
To address the rapid increase in national debt, Osborne announced £40 billion in new austerity measures. This intensified the £73 billion in cuts that had been proposed by the previous Labour government but had not been executed due to the change in government. The austerity measures included £81 billion in budget cuts over four years, and £32 billion in greater tax revenues, largely from an increase in the VAT from 17.5% to 20% beginning in January 2011 and a proposed bank levy. Cuts included a two-year pay freeze for public sector jobs, a three-year freeze on child benefits, and a reduction in tax credits for households earning over £40,000. In addition, 490,000 public sector jobs would be eliminated and government departments would receive cuts averaging 19%. The austerity plan also included £11 billion savings from welfare reform, and the state pension age was set to rise
from 65 to 66 by 2020.54
These spending cuts were the U.K.’s biggest since World War II, and far surpassed those seen in other advanced economies, including the U.S. If the U.S. implemented a similar level of cuts as those introduced in the U.K., they would total $650 billion, the entire projected cost of Medicare in 2015.55
Reactions to the Austerity Plan
While Osborne presented the massive spending cuts as a plan with no alternative, Labour leaders asserted that the coalition’s failure to move away from consensus would delay the U.K.’s return to economic growth. Labour’s shadow home secretary, Ed Balls, argued, “I believe that—by ripping away the foundations of growth and jobs in Britain—David Cameron, Nick Clegg and George Osborne are not only leaving us badly exposed to the new economic storm that is coming, but are undermining the very goals of market stability and deficit reduction which their policies are designed to achieve. . . . Whether our leaders make the right calls now on growth and jobs, the deficit, public spending and welfare reform will determine the future of our country for the next decade or more and shape the kind of society we want to be.”56
Critics contended further that Osborne’s plan failed to consider the effects on everyday Britons. Derek Simpson, the general secretary of Britain’s largest trade union commented, “This is not a
spending review—it’s a massacre.”57 In March 2011, more than 250,000 people rallied in Central London, marking the biggest union-organized protest since World War II.58 Businesses geared up for
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The United Kingdom and the Means to Prosperity 715-008
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reduced demand as their customers faced a drop in income. The director of external affairs at Asda, a supermarket chain, explained, “Where we know that there are going to be high levels of unemployment, or high levels of social housing, and people who receive benefits, there is clearly going to be a knock-on effect.” In 2013, a net total of 20 retail stores were closed per day across the U.K. In the town of Blackpool, nearly 24% of storefronts stood empty.59 In their place moved pawnshops, charity stores, and discount chains.
Many wondered how austerity and the government’s decision to reduce the role of the welfare state would impact Britain’s growing income inequality. Since 1975, income inequality in the U.K. had grown faster than that in any other OECD country (see Exhibits 11 and 12).60 In 2012, the top 20% of Britons had an average income of £78,283, more than 15 times higher than the average income of the lowest 20%, which averaged only £5,436. This ratio was 8 to 1 in 1985.61 High wealth inequality was also a concern. The lowest decile of Britons had an average total wealth of under £4,000,
compared with the top 10%, who had an average wealth of over £4.2 million (see Exhibit 13).62
While Osborne contended that “making work pay” would ultimately boost employment rates and reduce the structural deficit, the reforms cut social security benefits by £19 billion per year until 2015, and economically disadvantaged communities would feel the immediate impact.63 Austerity, moreover, had an unequal effect across the U.K., exacerbating existing regional disparities (see Exhibit 14). Communities in the north, which also struggled with higher unemployment rates and lower skill levels, would be harder hit than communities in southern Britain (see Exhibit 15). The residents of Blackpool, believed to be the town hardest hit by the austerity measures, were expected to lose £914 per year of disposable income. While Blackpool residents would lose 4.7% of their
income, Surrey residents were anticipated to only have a 0.9% cut in household income.64
One professor who studied the unequal impact of the reforms explained, “A key effect of the welfare reforms will be to widen the gaps in prosperity between the best and worst local economies across Britain. Our figures also show that the Coalition government is presiding over national welfare reforms that will impact principally on individuals and communities outside its own political heartlands.”65 Shadow employment minister Stephen Timms commented, “The government is hitting hardest the places where jobs are fewest, at a time when their policies are failing to deliver the growth they promised and when unemployment is forecast to rise.”66
A Return to Balanced Growth?
Economic recovery in the U.K. stalled after the austerity measures were enacted, with GDP growth measuring 0.3% in 2011. Unemployment continued to rise to 8.1%, the highest level in
seventeen years.67 Osborne explained the slow growth as a result of the spillover from the euro crisis, a period in which several European nations struggled with the collapse of financial institutions and high sovereign debt, resulting in a marked slowdown in growth and widespread loss of confidence (see Exhibit 16). Osborne maintained in his March 2012 budget speech that the U.K. government’s spending cuts were proving successful, and they remained the only way for Britain to reduce the budget deficit. However, Osborne introduced some easing of the austerity measures. Personal income taxes were reduced from 50% to 45% for the top tax rate, while the tax allowance threshold increased from £8,105 to £9,205. However, pensioners would no longer receive preferential tax allowances, and the child benefit was reduced for households with one parent earning more than £50,000.
As the euro crisis continued, Cameron faced pressure to reconsider the U.K.’s relationship with the EU. Euro-skepticism reached a peak after the EU advanced plans to create a single regulatory authority to oversee all banks across the Eurozone, a move Cameron insisted would challenge
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715-008 The United Kingdom and the Means to Prosperity
12
London’s role as a leading financial center. In January 2013, Cameron promised to hold a referendum on the U.K.’s membership in the EU in 2017 if the Conservative Party won the next general election in 2015. In his speech announcing the referendum, Cameron explained that there was a need for change within the EU to improve the Eurozone’s competitiveness, allow greater flexibility to accommodate the diversity in members, and institute greater democratic accountability. Cameron indicated that EU membership entailed greater political integration than just participating in a common market as initially promised. Cameron reflected, “The result is that democratic consent for the EU in Britain is
now wafer-thin.”68 The referendum was widely considered a concession to the euro-skeptic members of the Conservative party.
However, many warned that the referendum could negatively affect the U.K.’s standing as a financial center for the region. As a member of the EU, the U.K. attracted many financial firms to London due to its sizable market and the free movement of labor and capital with Europe. The former chairman of Lloyd’s banking warned, “Over a period of time, particularly the international side of (London’s) financial and services business would go elsewhere. . . . London would continue,
obviously, as the U.K.’s financial center. It would lose its position as the E.U.’s financial center.”69
By 2014, the U.K. experienced a strong recovery, with economic growth reaching 2.8%.70 The U.K.’s national statistics office released revisions to the nation’s GDP figures, reintensifying the debate over the impact of austerity on economic growth. The revised figures showed that the recession of 2008–2009 was less severe than initially believed and the recovery more swift. Moreover, some analysts noted that European nations that instituted the most strict austerity plans, such as the U.K. and Spain, were experiencing the highest growth rates. Others, however, contended that the return to growth was a side effect of the euro crisis subsiding, rather than evidence of the success of austerity. Another group of researchers argued that austerity delayed the recovery. Economist Alan Taylor commented, “Without austerity, U.K. real output would now be steadily climbing above its 2007 peak, rather than being stuck two percent below.”71 Another critic of austerity found that the
plan had on average cost U.K. households £3,500 over three years.72
Moreover, the positive growth was primarily seen in the services sector, which measured 3%
above its pre-recession peak.73 Since the late 1980s, the U.K. economy had transformed, and some worried that the nation was too dependent on services, particularly within the financial sector. Under Thatcher, the U.K. had largely abandoned its industrial policy. From 1980 to 2010, the industrial sector’s share of the economy halved, while the focus of the economy was shifted from manufacturing to services, particularly within the financial sector. By 2014, services dominated the economy, representing 80% of GDP, and the U.K.’s banking sector, the world’s fourth largest, managed over £5.4 trillion assets. Aided by its history as the head of a colonial empire, London was a true global financial center, exporting financial services around the world. In 2013, the U.K. had the world’s largest financial trade surplus (see Exhibit 17).74 In 2014, financial services grew at 4.3%,
outpacing the rest of the economy.75
Despite the positive signs of economic recovery in 2014, the U.K.’s economy was still below its precrisis peak level, making this the longest recession in the country’s history (see Exhibit 18). This raised concerns about secular stagnation, or a structural deficiency in demand beyond a downturn in the business cycle. The term “secular stagnation,” reintroduced in the debate by Harvard professor Larry Summers in a speech at the IMF, was used to characterize a period of negligible or low growth due to persistent or chronic underinvestment.76 The lack of investment led to falling per capita incomes over time, stagnant demand, and high unemployment. Low interest rates were one way to address secular stagnation, but the Bank of England could not lower nominal interest below zero.
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The United Kingdom and the Means to Prosperity 715-008
13
Moreover, persistent low rates carried risk of bubbles and financial instability. Supply-side barriers could also explain the persistent lack of investment, requiring structural reforms.
By early 2015, inflation and productivity growth in the U.K. fell to near zero, while wage growth
measured a weak 1.2%.77 The national statistics office commented on declining productivity, “These estimates show that the absence of productivity growth in the seven years since 2007 is
unprecedented in the post-war period.”78 Moreover, due to a lack of public investment, two-thirds of British companies feared U.K. infrastructure would deteriorate over the next five years.79
As the economy improved, many wondered whether the Bank of England would raise the official rate, and if so, when. Governor Mark Carney had previously stated the Bank of England would raise rates once unemployment fell to 7%. However, despite positive trends in the labor market, rebounds failed to follow among wages and productivity, causing the Bank to reconsider changes to the rate. Wage growth struggled to keep pace with inflation, and labor productivity remained low.
Analysts also worried about a potential housing bubble caused in part by the low-interest rate environment. Cameron stated that he believed the housing crisis was the “biggest risk” to the U.K.’s
recovery.80 A limited supply and growth in domestic demand, led by a growing population and an increase in single-person households, pushed house prices upward (see Exhibit 19). Prices had more than doubled since 2000, growing 10% in the past year alone. Compounding the problem, in 2011, new home construction plunged to the lowest levels since 1924.81 While low interest rates attracted greater numbers of homeowners, over two-thirds of outstanding mortgages in the U.K. had variable rates.82 In June 2014, the Bank of England announced new regulation within the lending sector in attempts to quell the bubble’s growth without limiting the overall growth of the economy. Only 15% of total outstanding mortgages within the industry could exceed 4.5 times a borrower’s income. Additionally, lenders were required to conduct affordability tests to determine whether borrowers
could service their mortgages in the event that interest rates rose by 3%.83
Additionally, Cameron had succeeded in keeping the U.K. whole after the Scottish people voted
no to independence in the September 2014 referendum.84 However, the overwhelming support for the Scottish National Party (SNP) in the 2015 election suggested continuing discontentment over the coalition government’s policies, including the disparate impact of austerity across regions, economic activities, and individuals, and the view that Thatcher’s policies were responsible for Scotland’s late-
twentieth 20th-century de-industrialization.85
Challenges Ahead
On May 7, 2015, the Conservative Party received the majority vote in the general election, and Cameron won a second term in office. Cameron had much to celebrate. He had politically survived the implementation of his controversial austerity package, and the U.K. finally appeared to have escaped from its longest recession. Encouraged by economic growth at around 2%, the labor market had shown remarkable improvement in 2015. Unemployment figures dropped from 8.0% to 6.6%, while the labor force was expected to grow by 1 million. Additionally, consumer confidence surpassed 2007 levels (see Exhibit 20). Yet, these accomplishments were far from certain, as the Bank
of England downgraded its growth forecasts following the election.86 Cameron knew productivity growth would be a challenge for his upcoming term. Others worried about the U.K.’s rising inequality and xenophobia, while lingering questions remained regarding relations with Europe. Cameron wondered, what else, if anything, should his government do to put the country on a sustained and balanced growth trajectory?
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For the exclusive use of , 2019.
715-008 The United Kingdom and the Means to Prosperity
16
Exhibit 4 U.K. Inflation, 1961–2012 (annual % change)
Source: Created by casewriter using data from the World Bank Development Indicators Database, August 2014.
Exhibit 5 Historical Bank of England Interest Rate, 1973–2013
Source: Created by casewriter using data from the Bank of England Statistical Interactive Database, September 2014.
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For the exclusive use of , 2019.
The United Kingdom and the Means to Prosperity 715-008
17
Exhibit 6 Growth Rate of Gross Value Added (GVA) of Financial Services, 1856–2010
Financial Services GDP
1856-1913 7.6 2
1914-70 1.5 1.9
1971-96 2.7 2.2
1997-2007 6.1 3
2008 5 -0.1
2009-10 -4.1 -1.6
1856-2010 4.2 2
Source: Stephen Burgess, “Measuring Financial Sector Output and its Contribution to U.K. GDP,” Bank of England Bulletin, 2011 Q3.
Note: Data before 1920 include Southern Ireland.
Exhibit 7 U.K. Historical Unemployment Rate and Real GDP Growth, 1949–2013
Source: Created by casewriter using data from the U.K. Office of National Statistics, September 2014.
For the exclusive use of , 2019.
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For the exclusive use of , 2019.
The United Kingdom and the Means to Prosperity 715-008
19
Exhibit 9 U.K. Net Debt, 1900–2012 (% GDP)
Source: International Monetary Fund, “A Historical Public Debt Database,” November 1, 2010.
Exhibit 10 International Comparison of Budget Deficits, 2006–2014 (% of GDP)
2006 2010 2011 2012 2013 2014
United Kingdom -2.7 -10.0 -7.9 -6.3 -5.9 -5.3
United States -2.2 -12.2 -10.7 -9.3 -6.4 -5.8
Greece -6 -11.0 -9.6 -8.9 -12.7 -2.5
Portugal -4.1 -9.9 -4.3 -6.5 -5.0 -4.0
Spain 2.4 -9.6 -9.6 -10.6 -7.1 -5.5
Japan -1.6 -8.3 -8.8 -8.7 -9.3 -8.4
France -2.4 -7.0 -5.2 -4.9 -4.3 -3.8
Australia 2.1 -5.1 -3.6 -2.9 -1.4 -2.5
Canada 1.6 -4.9 -3.7 -3.4 -3.0 -2.1
Italy -3.4 -4.4 -3.6 -2.9 -2.8 -2.7
Germany -1.7 -4.2 -0.8 0.1 0.0 -0.2
Belgium 0.1 -4.0 -4.0 -4.1 -2.7 -2.1
Euro area (15 countries) -1.4 -6.2 -4.1 -3.7 -3.0 -2.5
OECD (total) -1.2 -8.0 -6.5 -5.9 -4.6 -3.9
Source: Created by casewriter using data from OECD iLibrary, August 2014.
0.0
50.0
100.0
150.0
200.0
250.0
300.0
For the exclusive use of , 2019.
715-008 The United Kingdom and the Means to Prosperity
20
Exhibit 11 Gini Index of OECD Countries, 2010
Source: Created by casewriter using data from the OECD iLibrary, June 2014.
Note: 0 = Equal, 1 = Unequal.
Exhibit 12 Historical Top Decile Income Share: Europe and the U.S., 1900–2010
Source: Reprinted by permission of the publisher from Capital in the Twenty-First Century by Thomas Piketty, translated by Arthur Goldhammer, p. 323, Cambridge, Mass.: The Belknap Press of Harvard University Press, Copyright © 2014 by the President and Fellows of Harvard College.
0
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For the exclusive use of , 2019.
The United Kingdom and the Means to Prosperity 715-008
21
Exhibit 13 Wealth Distribution in the U.K., 2014 (by deciles)
Source: U.K. Office of National Statistics, June 2014.
Exhibit 14 Regional Gross Value Added per Head Index Comparison with U.K. Average, 1989, 2000, 2012
Source: Created by casewriter using data from the U.K. Office of National Statistics, September 2014.
-500
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
Billions (£)
Deciles
Private Pension Wealth
Physical Wealth
Financial Wealth (net)
Property Wealth (net)
60.0 80.0 100.0 120.0 140.0 160.0 180.0
North East North West
Yorkshire and The Humber
East Midlands West Midlands
East of England London
South East South West
England Wales
Scotland Northern Ireland
2012 2000 1989
For the exclusive use of , 2019.
715-008 The United Kingdom and the Means to Prosperity
22
Exhibit 15 U.K. Regional Unemployment Rates, Q1 2003–Q1 2012
Source: U.K. Office of National Statistics, June 2014.
Exhibit 16 U.K.’s Main Trade Partners
Exports by Destination Imports by Origin
Value (£
millions)
Share of
Total
Value (£
millions)
Share of
Total
1.) United States 40 981 13.4% 1.) Germany 56 324 13.6%
2.) Germany 29 953 9.8% 2.) Netherlands 34 769 8.4%
3.) Netherlands 25 589 8.4% 3.) China 33 393 8.1%
4.) France 21 281 7.0% 4.) United States 27 659 6.7%
5.) Irish Republic 19 027 6.2% 5.) France 24 252 5.9%
6.) Belgium & Luxembourg 14 670 4.8% 6.) Belgium & Luxembourg 20 569 5.0%
7.) China 12 402 4.1% 7.) Norway 17 537 4.2%
8.) Spain 8 786 2.9% 8.) Italy 15 113 3.7%
9.) Italy 8 621 2.8% 9.) Irish Republic 12 425 3.0%
10.) United Arab Emirates 6 226 2.0% 10.) Spain 12 341 3.0%
Total 304 756 100.0% Total 412 646 100.0%
Source: Created by casewriter using data from the U.K. Official of National Statistics, September 2014.
0
2
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6
8
10
12
14
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North East North West London
South East South West
For the exclusive use of , 2019.
The United Kingdom and the Means to Prosperity 715-008
23
Exhibit 17 U.K. Balance of Payments, 2005–2013 (billions of £)
2005 2006 2007 2008 2009 2010 2011 2012 2013
Current Account Balance -32.8 -44.4 -35.7 -22.6 -23.9 -48.6 -20.5 -59.7 -72.7
Trade Balance -68.6 -76.3 -89.8 -93.1 -82.4 -98.5 -100.2 -108.7 -107.9
Export of goods 211.6 243.6 220.9 252.1 227.6 265.7 299.1 300.5 304.8
Imports of goods -280.2 -319.9 -310.6 -345.2 -310.0 -364.2 -399.3 -409.2 -412.6
Net services 24.6 33.1 42.7 45.9 47.2 57.0 70.9 71.2 73.5
Export of services 114.2 128.3 143.9 155.6 153.2 166.0 183.7 186.2 190.2
Export of financial services 23.4 28.1 35.9 37.6 34.2 33.2 40.0 36.9 39.4
Import of services -89.6 -95.2 -101.2 -109.7 -106.0 -109.0 -112.7 -115.0 -116.7
Import of financial services -5.1 -5.9 -6.9 -7.4 -6.2 -6.3 -7.6 -6.8 -8.1
Net Primary Income 23.0 10.7 24.9 38.7 26.1 13.3 30.8 0.3 -10.7
Credit 186.5 237.3 292.8 263.5 172.7 155.5 194.3 161.2 147.5
Debit -163.5 -226.6 -268.0 -224.8 -146.6 -142.1 -163.5 -160.9 -158.2
Net Secondary Income -11.8 -11.9 -13.5 -14.1 -14.7 -20.4 -22.0 -22.5 -27.6
Capital Account 1.5 1.0 2.6 3.2 3.3 3.7 3.2 4.2 5.4
Financial Account 29.7 41.5 26.0 24.5 36.1 47.1 12.5 72.2 76.8
Net Direct Investment 53.8 39.9 -62.3 -37.8 17.2 13.4 -34.7 6.9 27.1
Assets -86.0 -79.4 -182.3 -184.2 18.7 -25.3 -57.0 -35.4 -4.6
Liabilities 139.9 119.3 120.0 146.3 -1.6 38.8 22.4 42.3 31.7
Net Portfolio Investment -21.9 13.7 125.8 324.1 31.7 1.1 -44.6 -186.4 39.8
Assets -151.0 -138.8 -92.0 123.5 -163.3 -76.8 -6.6 -113.3 11.3
Liabilities 129.0 152.5 217.9 200.5 195.0 77.9 -38.0 -73.1 28.5
Financial Derivatives 9.6 20.6 -27.0 -121.7 29.1 32.8 -2.9 30.0 -14.7
Other Investments -11.8 -32.6 -10.6 -140.1 -41.9 -0.3 94.6 221.7 24.6
Change in Reserve Assets -0.7 0.4 -1.2 1.3 -5.8 -6.1 -4.9 -7.6 -5.0
Net Errors and Omissions 2.3 1.5 8.3 -6.4 -9.7 3.9 9.7 -9.1 -4.6
Source: Created by casewriter using data from the International Monetary Fund, August 2014.
For the exclusive use of , 2019.
715-008 The United Kingdom and the Means to Prosperity
24
Exhibit 18 Number of Quarters from Start of Recession to Recovery in the U.K. (GDP, % change from pre-recession peak)
Source: Created by casewriter using data from the U.K. Office of National Statistics, January 2015. Data for 1930–1934 are from James Mitchell, Solomos Solomou, and Martin Weale, “Monthly and quarterly GDP estimates for interwar Britain,” NIESR Discussion Paper no. 348, National Institute of Economic and Social Research, 2009.
Note: Data is seasonally adjusted, chained volume prices.
Exhibit 19 Halifax Housing Price Index, 1983–2013
Source: Created by casewriter using data from Halifax Pricing Index, Lloyds Banking, August 2014.
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Number of quarters from start of the recession
Great Depression (1930-1934) 1973-1975
1979-1981 1990-1993
Great Recession (2008-2013)
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
900.0
National Average Greater London North
For the exclusive use of , 2019.
The United Kingdom and the Means to Prosperity 715-008
25
Exhibit 20 U.K. Consumer Confidence
Source: Created by casewriter using Bloomberg, accessed May 2015.
-50
-40
-30
-20
-10
0
10
20
For the exclusive use of , 2019.
715-008 The United Kingdom and the Means to Prosperity
26
Endnotes
1 The United Kingdom consists of Great Britain and Northern Ireland. In fact, the official name of the country is the United Kingdom of Great Britain and Northern Ireland.
2 Economist Intelligence Unit CountryData, August 2014.
3 “U.K. to post strongest growth in G7, says Item Club,” BBC News, July 20, 2014, http://www.bbc.com/news/business- 28393377, accessed August 14, 2014.
4 Paul Krugman, “Return of Expansionary Austerity,” New York Times, April 11, 2014.
5 Halifax Housing Price Index, Lloyds Banking, August 2014.
6 U.K. Office of National Statistics, “Labour Productivity, Q4 2014,” April 1, 2015.
7 For more information on British industrialization, see Thomas McCraw, Creating Modern Capitalism: How Entrepreneurs, Companies, and Countries Triumphed in Three Industrial Revolutions (Cambridge: Harvard Business School Publishing, 1996).
8 The gold standard is a monetary system under which the basic unit of currency is defined by a stated quantity of gold. Since 1816, the U.K. operated under the gold standard, and by 1870, most European nations had followed suit.
9 For more information, see Thomas McCraw, “The U.K. and the Gold Standard in 1925,” HBS No. 383-081.
10 See Huw Pill, “John Maynard Keynes: His Life, Times, and Writings,” HBS No. 702-092.
11 W. R. Garside, British Unemployment 1919–1939: A Study in Public Policy (New York: Cambridge University Press, 1990).
12 John Maynard Keynes, The Means to Prosperity (New York: Harcourt, 1933).
13 Ibid.
14 Thomas Cooley and Lee Ohanian, “Postwar British Economic Growth and the Legacy of Keynes,” Journal of Political Economy 105, no. 3 (June 1997).
15 Adam Smith, Inquiry into the Nature and Causes of The Wealth of Nations, ed. Edwin Cannan (New York: Bantam Classic, 2003).
16 Bernhard Ebbinghaus and Jelle Visser, Trade Unions in Western Europe Since 1945 (New York: Grove’s Dictionaries, 2000).
17 See Huw Pill and Ingrid Vogel, “The Blair Wealth Project: Antecedents and Prospects,” HBS No. 702-008.
18 Ibid.
19 Kevin Hawkins, British Industrial Relations, 1945–1975 (London: Barrie and Jenkins, 1976), quoted from John Goodman and David Palmer, “Great Britain: Decline or Renewal?” HBS No. 389-011.
20 Pill and Vogel, “The Blair Wealth Project.”
21 Quoted in ibid.
22 Bonnie Angelo, “The Iron Lady Sings,” Time, March 31, 2003.
23 Margaret Thatcher, speech at Lord Mayor’s Banquet, December 11, 1979.
24 John Goodman and David Palmer, “Great Britain: Decline or Renewal?” HBS No. 389-011.
25 Margaret Thatcher, speech to Conservative Party Conference, October 20, 1967.
26 Kathleen Thelen, “Varieties of Labor Politics in the Developed Democracies,” in Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, eds. Peter Hall and David Soskice (Oxford: Oxford University Press, 2001).
27 Pill and Vogel, “The Blair Wealth Project.”
28 Margaret Thatcher, interview with Llew Gardner for The Week, February 5, 1976.
29 Niall Ferguson, “Who Broke the Bank of England,” HBS No. 709-026.
30 Data from the UK Office of National Statistics, accessed September 2014.
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31 Luca Benati, “The inflation-targeting framework from an historical perspective,” Bank of England Quarterly Bulletin, Summer 2005.
32 Richard Davies, Peter Richardson, Vaiva Katinaite, and Mark Manning, “Evolution of the U.K. banking system,” Bank of England Quarterly Bulletin, December 13, 2010.
33 Ibid.
34 Ibid.
35 “FSA abandons ‘light touch’ regulation,” Outlaw, Pinsent Masons, March 18, 2010.
36 “The Bank that failed,” The Economist, September 20, 2007.
37 “Liquidity Support Facility for Northern Rock plc,” Tripartite Statement by HM Treasury, Bank of England, and Financial Services Authority, September 14, 2007; and “Rush on Northern Rock continues,” BBC News, September 15, 2007.
38 “Why a run on Northern Rock and not Countrywide?” Wall Street Journal, October 18, 2007.
39 Gonzalo Vina and Ben Livesey, “U.K. Government Starts Northern Rock Nationalization,” Bloomberg News, February 18, 2008.
40 Julia Werdigier, “Britain Announces Huge Bank Bailout,” New York Times, October 8, 2008.
41 “Gordon Brown admits ‘big mistake’ over banking crisis,” BBC News, April 11, 2011.
42 George Parker and Brooke Masters, “Osborne abolishes FSA and boosts Bank,” Financial Times, June 16, 2010.
43 Japan had implemented quantitative easing policies in the previous decade. See Laura Alfaro and Akiko Kanno, “Kinyuseisaku: Monetary Policy in Japan (A), (B),” HBS Nos. 708-017 and 709-056. See also Laura Alfaro and Hilary White, “Kinyuseisaku: Monetary Policy in Japan (C),” HBS No. 713-086. See also Laura Alfaro and Renee Kim, “The First Global Financial Crisis of the 21st Century,” HBS No. 709-057. See Laura Alfaro and Renee Kim, “U.S. Subprime Mortgage Crisis: Policy Reactions (A), (B),” HBS Nos. 708-036 and 708-045.
44 Brett Fawley and Christopher Neely, “Four Stories of Quantitative Easing,” Federal Reserve Bank of St. Louis Review 95, no. 1 (January/February 2013, ), pp. 51–88.
45 ‘Gilts’ Bonds are issued by the British government and generally considered low risk. Gilts are the U.K. equivalent to U.S. Treasury securities. The name originates from the original British government certificates, which had gilded edges.
46 “The Bank of England’s Sterling Monetary Framework,” Bank of England, updated January 2014.
47 Fawley and Neely, “Four Stories of Quantitative Easing.”
48 Ibid.
49 Economist Intelligence Unit, CountryData, August 2014.
50 Tim Castle, “Tackling deficit needs all-party deal—Lib Dems,” Reuters, May 1, 2010.
51 John Maynard Keynes, “How to Avoid a Slump,” Times of London, January 12, 1937.
52 George Osborne, “Transcript of the Chancellor’s Speech,” Financial Times, October 20, 2010.
53 Ibid.
54 Mark Hoban, “Budget 2010,” HC 61, HM Treasury, June 22, 2010.
55 Daniel Pimlott, Chris Giles, and Robin Harding, “U.K. unveils dramatic austerity measures,” Financial Times, October 20, 2010.
56 Ed Balls, “There is an alternative—Ed Ball’s Speech at Bloomberg,” August 27, 2010.
57 “Spending Review: Reaction to Osborne Statement,” BBC News, October 20, 2010.
58 Emma Alberici, “Scores in custody after London anarchist riot,” ABC News, March 28, 2011.
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59 Chris Giles and Sarah Neville, “Austerity Audit,” Financial Times, April 11, 2013, http://ig.ft.com/austerity-audit.
60 OECD, “Divided We Stand: Why Inequality Keeps Rising,” December 5, 2011.
61 Ibid.
62 Data from the U.K. Office of National Statistics, August 2014. For more information on the wealth inequality debate, see Thomas Piketty, Capital in the Twentieth Century (Cambridge, MA: Harvard University Press, 2014). Also see the rebuttal from Chris Giles and Ferdinando Giugliano, “Thomas Piketty’s exhaustive inequality data turn out to be flawed,” Financial Times, May 23, 2014.
63 Giles and Neville, “Austerity Audit.”
64 Ibid.
65 Professor Fothergill, quoted in Giles and Neville, “Austerity Audit.”
66 Ibid.
67 Economist Intelligence Unit, CountryData, August 2014.
68 “David Cameron’s EU Speech—Full Text,” Guardian, January 23, 2013.
69 Katy Barnato, “Could ‘Brexit’ cost London its financial hub status?” CNBC, April 28, 2014.
70 “UK’s economic growth for 2014 revised up,” BBC News, March 31, 2015, http://www.bbc.com/news/business-32126975, accessed May 1, 2015.
71 Alan Taylor, “When is the time for austerity?” Vox, July 20, 2013.
72 Simon Wren-Lewis, “How much has austerity cost (so far)?” Mainly Macro, July 21, 2013.
73 “U.K. economic growth revised up to 3.2%” BBC News, August 15, 2014.
74 “Key Facts about the U.K. as an International Financial Centre,” TheCityU.K., June 2014.
75 Ibid.
76 David Lipton, “Opening Remarks,” speech at Fourteenth Jacques Polak Annual Research Conference, “Crises: Yesterday and Today,” November 7, 2013. Also see Larry Summers, “Bold reform is the only answer to secular stagnation,” Financial Times, September 7, 2014.
77 “U.K. Inflation Rate Falls to 4 Year Low,” BBC News, December 17, 2013.
78 U.K. Office of National Statistics, “Labour Productivity, Q4 2014,” April 1, 2015.
79 “Business fears for future over lack of infrastructure investment,” Financial Times, September 15, 2013.
80 George Parker, “David Cameron agrees house prices are biggest risk to U.K. recovery,” Financial Times, May 20, 2014.
81 “Building Prosperity?” Economist Intelligence Unit Political Analysis, September 6, 2012.
82 John Authers, “The BoE’s biggest test is yet to come,” Financial Times, June 27, 2014.
83 Ibid.
84 “Scottish referendum: Scotland votes ‘No’ to independence,” BBC News, September 19, 2014, http://www.bbc.com/news/uk-scotland-29270441, accessed May 1, 2015.
85 “Cameron urges Scots: don’t rip apart U.K. and break my heart,” The Herald Scotland, September 10, 2014; and “Cameron insists he will not resign if Scotland leaves union,” Financial Times, September 4, 2014.
86 Chris Giles, “Bank of England downgrades UK growth forecast,” Financial Times, May 13, 2015.
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