Fiscal and Monetary Policies in the UK: Achieving Government Objectives

Module title	ECO4012 Principles and Applications of Macroeconomics
Assignment number and title	Semester 2 (Essay)
Date set:	10th January 2022
Deadline Semester 2:	6th April 2022
Grade returned:	10th May 2022
Programme Leader	Shahid Akram
Module Leader:	Steve Adewole
Module Lecturers:	Faisal Usmani, Ajewole Olajide

Introduction

Government policies are designed to ensure that the business and the microeconomy of the nation is performing well. In free-market operations, the intervention of the government is extremely pivotal to ensure that the business organisation is not exploiting the economy. Fiscal policies can be defined as the way the government plans to spend the taxes it collects towards the economy of the nation. The government of the UK has a vast role in shaping the economy of the nation and it helps in ensuring that the business functions are properly aligned with the interest of the economy of the nation (Heald and Hodges, 2022). It has to be noted that the Keynesian theory of macroeconomics states the importance of government intervention in the free markets.

With the help of taxation, the government can mobilise the resources and diversify as per the needs of the national economy. The fiscal policies help in providing financial aid to the private sector and expand the business organisation. Another important function of the fiscal policy is to stimulate the savings of the general populace. The roads and other infrastructural aspects of the nation can only be successful if the governmental organisation can optimise the taxes being collected from the business enterprises and the public. The tools which are used by the government are – interest rates, taxes and spending (Afonso et al., 2019). A good fiscal policy will allow the government organisation to ensure that it is being able to reduce poverty and minimise the impact of negative global economic repercussions It has to be noted that in a circular economy government spending plays a very pivotal role in injecting funds into the economy. The essay will shed light on how fiscal policies can be used to achieve major government objectives.

What are government policies?

The government policies are the tools used by the regulatory authorities of the nation to ensure that the markets are efficient and not being exploited. As discussed, in the circular economy government spending helps the nation to reach a macroeconomic equilibrium. The leakages within the nation consist of– savings (S), taxes (T) and imports (I) and the injections consists of– exports (E), government spending (G) and investments (V). Thus, the equilibrium can be reached if – (S+T+I) = (E+G+V). It can be seen that government policies play very important roles in both injection and leakage of funds within the economy (Cardoso, 2019). The government policies are set by the regulatory authorities selected by the general populace of the nation. These policies are often supported by the fiscal and monetary aspects of the government.

The two major government policies are – trade and education. One of the main roles which can be considered to be pivotal here is that international trade between nations is a very important factor. It has to be noted that the organisational developments within the nation help in developing better trade policies. Alongside this, the educational policies help the nation to ensure is that the young population grow up to be competitive and make a contribution to the human capital. Most of these policies and intricacies can only be solved with the help of structured monetary policies. The taxes earned are supposed to be judiciously spent by the government so that the objectives of the policies can be achieved efficiently.

The fiscal theory of price level states that the government fiscal policies are the major determinant of the price levels of the goods (Brunnermeier et al., 2020). It has to be noted that the price levels are the ones that are able to impact the aggregate demand of the nation. On the other hand, the Keynesian theory states that the tax rates of the government are required to be altered in order to impact the aggregate demand of the nation. (Woodgate, 2020) Thus, it can be said that the organisational tax rates function as one of the main factors which impact the economy of a nation.

What are Government Policy objectives?

The policy objectives can be defined as the main factors the government wants to achieve through its policies. After the Brexit, the government of the UK have tried to reproduce how it can triplicate the trading policies for the continuity of business health within the nation. The trade agreements set out the basic rules which can be followed by both nations to ensure they can resolve any form of conflict. (GOV.UK, 2022). In addition to this, the major objective of the educational policies is to ensure that the upcoming generation is literate and can compete within the industry.

The United Kingdom has proper policies regarding trade with both European and non-European nations. It has to be noted that after the Brexit was finalised a lot of changes has to be made in the policies and its objectives. The nation prioritises the profit aspects for the locals and ensures that the earnings from these are properly diverted among the general populace. It has to be noted that while import and export help in earning but it requires an immense amount of investment as well. The funds collected from taxes are supposed to facilitate these aspects of the policy. It has to be noted that the government of the UK will be able to collect taxes if a person has an earning starting from £ 12,571 to over £ 150,000 (GOV.UK, 2022). The tax rates vary from 20% to 45% considering the income of the person. Alongside, the government of the nation can earn from exports and other related activities. The fiscal and monetary aspects of the nation will be able to ensure that these sources can be diversified into the policies.

What is Fiscal Policy and Monetary Policy?

The fiscal policy can be considered to be how the government can spend the funds it collects from the business organisation and the general populace. It has to be noted that the Fiscal policies are the brainchild of John Maynard Keynes who was a British economist. One very important aspect to be noted here is that the business organisations within the nation play a very important role in this. There are two main forms of fiscal policies – expansionary and contractionary fiscal policy (McCallum, 2019). If the nation is going through any form of recession, then the government will be applying expansionary policies. This can be done by fuelling the nation’s aggregate demand (Mankiw, 2017). During any form of mounting inflation, the government will use contractionary fiscal policies which can be done by raising the tax rates and decreasing the total amount of government spending.

Monetary policies are a part of the fiscal aspects of the nation’s government. One of the major contrasts between the monetary and fiscal policies is that the monetary aspects are specifically looked after by the central bank of the nation and the fiscal policies are more inclined towards government decision making. A monetary policy might include activities such as reducing the bank rates so that the general populace can take loans at a lower rate. In case the inflation rate rises in the UK, then the central bank will take measures to control it. As of now, the inflation rate of the UK is 2.62 % in the year 2022 (Statista, 2022). In such a case, the central bank will try to bring certain monetary policies into action to ensure that the general populace can get some relief.

Figure 1: Inflation Rate of the United Kingdom

(Source: Statista, 2022)

The monetary and fiscal policies are important to ensure that the general trade in the nation is being efficient. In the UK the Bank of England acts as the central authority of the banking aspects which sets the Monetary Policy Committee (MPC). The committee has set the target to meet the 2% inflation rate and has voted to increase the bank rate to a total of 0.25% (Bank of England, 2022). The central bank reserves also play a very important role in setting the monetary and fiscal policy of the nation and ensuring that the objectives of the policies are being properly achieved. There are many other factors to which the fiscal and monetary policies can be used, such as reducing poverty and the unemployment rates. It has to be noted that the major motive of the money and the fiscal policy is the same and that is to uplift the economy and control it at times of any form of economic catastrophe.

The expansionary fiscal policies include aspects such as tax cuts, any form of transfer payments, rebates and an increase in the number of governments spendings. It is important to note that the business organisations will be required to ensure that they can function as per the policies set by the government. The tax cut and the increase in government is done at the same time to increase the aggregate demand of the nation. One very important aspect that has to be noted here is that a decrease in the rates of taxes will allow the individuals to have a higher disposable income which in turn will increase their purchasing capacity. Any increase in the purchasing power of the consumer will automatically increase the overall demand of the market (Jaroci?ski and Karadi, 2020). One of the most important objectives of the expansionary policy is to promote a healthier economy. On the other hand, the monetary policies of the nation are more concerned with financial issues rather than the entire economy (Mankiw, 2017). Although one very important aspect to note here is that the objectives of the monetary policies are complementary to the fiscal aspects of the nation. In many cases, it can be considered that the monetary policies of the country are being set to facilitate the business organisation. It is very important to ensure that all the policies are set for the betterment of the economy as a whole and not for a singular entity. Thus, the audit of the governmental policies is required for maintaining the transparency of the monetary and fiscal aspects.

The growth in real income of the global economy has contributed to the increased inflation around the world (Hansen, 2018). It has to be noted that many different forms of economic aspects impact the fiscal policies of a nation. It has been forecasted that in the next few years the nation will be able to earn an increased amount from organisational taxes (Statista, 2022). This will help the nation to increase its government spending as well. One very important step that the government can take is to increase the number of business organisations functioning in the nation which will in turn help in ensuring that the nation can earn more taxes directly rather than by increasing the rates.

Figure 2: Increased forecast of organisational tax in the UK

(Source: Statista, 2022)

There are other complicate factors aligned with the monetary and fiscal policies of the nation such as the foreign exchange rates and how they can be improved. The gold reserves of the nation also play a very important part in forming the fiscal and monetary policies of the nation.

Figure 3: UK Gold Reserve History

(Source: Gold. Co.UK, 2022)

It has to be noted that being one of the largest economies in the work, the UK has only the 16^th biggest gold reserve around the world (Gold.co.uk, 2022). The gold reserve has played a very pivotal role in forming fiscal policies all around the world. It acts as convertible money but in recent times the importance of the gold reserve has decreased in regards to the formation of fiscal and monetary policies.

How can either fiscal or monetary policies be used to achieve government policy objectives?

The fiscal and the monetary policies are the major ways in which the regulatory authorities of the nation will be able to achieve the major governmental objectives. The trade policies of the nation are important to maintain a balance between the import and export aspects of the nation. As per the reports it has been recorded that the total trade deficit of the UK is £ 9.3 billion in the past three months (Office for National Statistics, 2022). The trade deficit impacts the government’s ability to spend and therefore has a shrinking impact. Proper fiscal policies will ensure that the nation is recording a proper and profitable venture. Thus, it needs to be ensured that the organisational aspects are properly issues to maintain proper fiscal policies, business organisations play important roles in the formation of positive trade relations.

The government generally uses fiscal policies to strengthen the economy and reduce poverty and any form of economic backwardness which plagues the development of the nation. The major objective of trade policies is to maintain a trade surplus and enjoy global power and development. With the help of proper fiscal policy, it can be said that the nation will be able to make better trade policies. Corporate taxes have an impact on the trade balance of the nation. It has to be noted that business organisations can bring many different forms of foreign investments which helps in strengthening the nation’s foreign reserves. The nation’s foreign reserve can help in performing better in global trade. Now if the regulatory authorities decrease the total rate of corporate tax in the UK, then these companies will have more disposable income and therefore will be able to strengthen the foreign reserve even more. This finally will allow the nation to earn a trade surplus.

The education policies of the nation are made to ensure that the next generation can learn more and compete efficiently. One very important aspect to note is that these policies are interlinked with each other and in many ways, it can be said that regulatory authorities try to complement these aspects. It has to be noted that the spending on education has decreased since 2019 (UK Parliament, 2022). The education policies have however been revised and been ensured that the major objectives remain intact. The sharp cut in the GDP of the UK in the year 2020 meant that there was a sharp rise in spending on higher education. In addition to this, the price determination theory will dictate the terms of the affordability of education by the consumers.

The fiscal policies of the nation have an immense impact on the education aspects of the nation. It has to be noted that there are two main modes of education in the UK – public and private and has their expenses. Higher education can be even more costly for many. Thus, a lot depends on the disposable income of the general populace of the nation. It has to be noted that a lower amount of disposable income will mean that the general populace might not be able to conclude to the major educational policy objectives set by the government. The increase in inflationary rates will make it even more difficult and therefore any form of contractionary fiscal policy can help maintain the major objectives of the educational policies. One of the major educational objectives of the UK is that generate a fund of £1 billion for childcare before and after school hours (Office for National Statistics, 2022). One very important aspect to note here is that this can be efficiently raised with the help of an increase in corporate or general tax rates.

Other factors that can influence the success of the chances of success

It is very important to consider the fact that the government and the regulatory authorities of the nation will be required to find a balance between the contractionary and expansionary fiscal policies to achieve the major objectives of the trade and educational policies. In many cases, the government might need to decrease the tax rates and at the same time, the central bank might a good decrease the total amount of bank rate. It is also important to note that many times the government might be required to use funds from donations to fulfil the objectives efficiently, which is directly related to the Keynesian theory of fiscal policy.. Another important objective of the educational policy of the UK is to assess the interest rate on student loans. Higher interest rates can contribute to more and more students dropping out of college. The fiscal policymakers and the central bank will be required to discuss the major aspect of the same and contribute to the decrease of student loans which can help the nation achieve its educational objectives.

Conclusions

At the end of the analysis, it can be said that the fiscal and monetary policies play a very important role in ensuring that the economy of the nation is having steady growth. It has been found that the fiscal and monetary policies are complementary to each other. Some of the major differences between the fiscal and monetary policy are that the monetary aspects are generally taken care of by the central bank of the nation which in this case is the Bank of England. On the other hand, fiscal policies have a wider scope and, in many ways, it can be said that it is mostly taken care of by the government. Depending on the condition of the nation’s economy the government and other regulatory bodies of the nation will be able to able to decide what form of policies can be used.

There are two different forms of fiscal and monetary policies that can be used by the regulatory authorities – expansionary and contractionary. The expansionary policies are generally used to ensure that the economy of the nation is being able to grow out from any form of redundancies. One very important aspect to note here is that many times the government might require to exercise both expansionary and contractionary aspects of the policies. The contractionary policies are used by the government during any form of the excessive inflation in the nation. There are many ways in which these policies can be used such as cutting the tax rates and increasing the bank lending rates. Historically the gold reserves have also played a very important role in the functioning of the fiscal policies for a better economy

The fiscal policies are pivotal to ensure that other policies such as the trade and education of the nation are also properly managed. One of the main aspects of the fiscal policies is how the government can earn and how it can spend to build better infrastructure. One of the most common ways in which the regulatory bodies of the nation earn revenue is by the collection of taxes. Now if the disposable income of the general populace falls due to the increase in tax rates, then their purchasing capacity will fall down and with that, the aggregate demand will also fall. Thus, maintaining a positive aspect of the nation’s fiscal policies will ensure that the nation can meet the major trade and educational policy objectives.

References

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