A2 econ session 5

A Level Economics – Year 2 (A2) Revision Workshop
Session 5
Current UK Policies
46

Session Outline
46
Taking the pulse of the UK and EU economies
Assessing the health of the global economy, and its impact on the UK
UK macroeconomic policies
Economic policies exam questions

Measuring the economy – basic indicators
46
2.6%
5.1%
0.3%
£2.7bn
deficit
4.3%
0.7%
£3bn
deficit
2.0%
Will these figures
be higher or lower
in 2016?
Do you think the EU
figures were higher or
lower than the UK’s in
2015?
10.4%
0.3%
£41.4bn
surplus
1.5%
9.6%
0.5%
£18.1bn
surplus
1.2%
Do you expect these
figures to be higher or
lower in the EU in 2016?

Measuring the economy – additional indicators
46
88.6%
-4.4%
0.325
Will these figures
be higher or lower
in 2016?
86.9%
-4.1%
0.37
Do you expect these
figures to be higher or
lower in the EU in 2016?
Do you think the EU
figures were higher or
lower than the UK’s in
2015?
93.5%
-2.2%
0.31
95.0%
-2.1%
0.3

Measuring the economy – even more!
46
1.4%
0.5%
-4%
0% Consumer
Business
4.4%
UK: 2005 = 100
90.7
2.1%
0.75%
-1.9%
0.7%
4.5%
76.2
Describe the UK
trend
-0.29%
0.05%
0.07%
-9%
12.8%
86.2
-0.16%
0.05%
0.25%
-5.3%
11.8%
89.2
Describe the EU
trend
EU: 1990 = 100

UK economic outlook from PWC
47

3 big concerns in the global economy
47

Changes in the global economy and the UK
47
Reduced inflation in China therefore
cheaper imports; less rapid growth in CO2 emissions in China; less
global demand for commodities therefore raw material prices may fall
Reduction in Chinese demand for UK
exports (finance, tourism); reduction in availability of Chinese products
/ manufactures; trigger another global recession
Can you think of three advantages and three disadvantages for the UK?

47
Less bureaucracy / regulation / red tape for
businesses; better control of borders; negotiate our own trade agreements;
reduction in gov’t spending on EU membership
EU is a major export partner and the
value of UK exports may fall; expensive & lengthy renegotiation process
for trade deals; loss of political security

47
greater access to a variety of markets; good
for our weapons / military / satellite export industries; less influence by the
US (and China) on global policy
Reduction in business and consumer
confidence which could reduce trade and growth; disruption to supply
chains; higher insurance costs.

48

Global labour force participation rates
48

Global economy snapshot
48
Fall in commodity
& oil prices slowing
growth to 3.7%
BUT: political /
institutional
constraints prevent
higher growth`
Domestic demand
is rising
AND: investment
and productivity
set to rise over next
decade
Chinese annual
growth down to
3.7%
BUT: India and SE
Asia are growing –
but not by much
more than China
Hit hard by fall in
price of
commodities & oil
AND: informal
sector too large,
investment too low
Strong domestic
demand – GDP up
by 2% in 2016
BUT: profits
threatened by
higher int. rates &
rising labour costs

Policies - overview
48
Fiscal
• Any policy relating
to gov’t spending,
tax and/or
borrowing
• Affects AD but can
affect AS, depending
on the nature of
gov’t spending and
tax policy
Monetary
• Any policy relating
to interest rates,
exchange rate
and/or money
supply
• Affects AD but can
affect AS if
investment is
affected
Supply Side
• Any policy leading
to an increase in
the quantity or
quality of factors of
production
• Affects AS but can
affect AD if I or G
increases

UK fiscal policies (Budget 2015 and 2016)
Borrowing
Reduce deficit by 1.1% per year
Run a budget surplus of £10.4bn by
2019-202
National debt to 68.5% of GDP by
2020-21
Taxation
Raise the personal allowance
to £11,500 by April 2017
Cut corporation tax (17% by
2020)
40% tax rate at £45,000 by
April 2017
“Sugar Tax” to raise £520m
annually
Government Spending
Increase spending on NHS &
defence
Cut £12bn from welfare
spending
Free childcare for 30 hours
Spending down to 39.5% of
GDP by 36.9%
48

UK fiscal policies – more depth
48
Increased personal
allowance
• “Reward work & dis-
incentivise benefits”
• Was £6,475 in 2010
• Moving to £11,00 in
April 2016 and
£11,500 in April 2017
• Aiming for no tax on
30hrs at the NMW
Lower corporation tax
• Now 20% for large
and small businesses
• Aiming for 17% by
2020
• Also, companies
must pay tax closer
to the date they earn
profits
Bank profits tax
• Balance the possible
costs of this “risky
sector” against UK
competitiveness
• New tax of 8% on
bank profits in
addition to
corporation tax

Key elements of UK monetary policy
48
Monetary
Policy
Independent
Central Bank
Transparency
Inflation
Targeting
Breakdown of
interest rate
mechanism
QE worth
£325bn
Forward
Guidance
Financial
Stability

Monetary policy
48
•Attempts to pre-warn businesses and consumers
about interest rate and QE decisionsForward
Guidance
• Aided by transparency e.g. publication of MPC
minutes
Inflation
Targeting
•Established April 2013
•Identifies and monitors risks in the financial system
(“stress tests”)
Financial Policy
Committee

Labour markets policy
48
National Living Wage
• £7.20ph for over 25s from April 1st 2016
Universal Credit – Youth Obligation for 18-21 year olds
• To earn the Credit, young people must carry out a 6 month Youth Obligation i.e. receive
intensive support
• After 6 months, they MUST “earn or learn” – apprenticeships or work placements
New Apprenticeships
• Apprenticeship Levy of 0.5% on large company payrolls to fund 3m apprenticeships
• An additional 16,000 this year – aiming to be equivalent to degree-level qualifications

International policy
48
UK Single
Market Centre
• A 2012 initiative to make it easier for UK businesses to find out how to trade in Europe
TTIP
Negotiations
• A potential EU-US free trade agreement, still being negotiated
• In February, the US said if the UK left the EU, they would not include the UK in the
agreement
EU
Renegotiation
• EU In-Out Referendum June 23rd 2016
• UK’s renegotiated membership includes benefit restrictions for migrants, no bailout by the
UK of EU states, cut in “red tape”, regain sovereignty

Supply side policies
48
Northern
Powerhouse
Crossrail 2 /
Elizabeth Line
Fixing the
Foundations
30 hours
childcare
Raising school
leaving age
Modern
Apprenticeships
Enterprise
Zones
Midlands
Engine for
Growth
Raising Personal
Allowance
Reducing
corporation tax
rates
R&D Tax Credits Help to Buy Roads Fund
Digital Economy
Centres
National Living
Wage

UK Productivity
48

Supply side policy
48
Fixing the
Foundations
• 15 point plan to boost
productivity growth
• Includes improved
transport, less
regulation, & higher skills
Help to Buy
• Reduce wealth inequality
• Gov’t helps with deposits
for first-time buyers, and
acts as a mortgage
guarantor
30hrs Childcare
• Increase from 15 to 30
hours
• Reduce economic
inactivity
• Reduce need to claim
benefits

Essay Technique Tips
49
Strong evaluation
Evaluate each point – “as
you go”
Be specific not general Use evidence Reach a judgement
Link CAUSE to EFFECT
Analytical chains Include diagrams Focus on the PRECISE question
Show off your knowledge
Explain key terms Use technical vocab throughout Use examples everywhere

Focus on the impact on
macro objectives e.g.
economic growth,
unemployment,
inequality
Discuss the likely effects of raising the personal
allowance to £11,500 from £10,800 in April 2017
49

49
Raising the tax-free allowance could cause unemployment to fall even further
Allowance increased from around £6500 in 2010 to £11500 in April 2017; unemployment has fallen over that time too
• People in work keep more of their income, therefore
spend more due to having a high MPC, so AD rises,
increasing demand for labour
• Furthermore, the unemployed are incentivised to work
because income from work is higher relative to income
from benefits – especially true due to cuts in welfare
payments.
AD / AS diagram, showing rightward shift in AD,
leading to rising real GDP and a move closer to the
full employment level of output

49
Increase of just £700 too small to
alter incentives to work, therefore
unemployment may be unchanged
(although this small change comes
after some huge changes)
Unemployment is unlikely to be
voluntary – despite the incentive of
higher pay, the unemployed may
be occupationally or geographically
immobile and unable to access
available jobs, so unemployment
may be unchanged
For those already in work, the
additional £700 of income may be
spent on leakages from the circular
flow e.g. imports or savings, and
therefore not stimulate demand for
labour
Such a small change in the personal allowance is unlikely to have much impact on unemployment
EXAM TIP – notice how the evaluation points are all SPECIFICALLY related to unemployment

This needs explaining e.g.
one-size fits all,
asymmetric inflation target
(<2%), very late use of QE
etc
Make sure you
don’t confuse this
with the EU in
general!
Focus on the impact on
macro objectives e.g.
economic growth,
unemployment,
inequality etc
Discuss the likely impact on Euro Area economies
of the ECB’s approach to monetary policy
49

49
The “one-size fits all” monetary policy can worsen inequality in Euro Area economies
The ECB’s Bank Rate is below the UK’s, at 0.05%, and is the same for all Euro Area countries, including Germany
which is the EU “powerhouse”, and the struggling Greece and Spain
Germany’s economy is growing and inflationary
pressures are strong – a higher interest rate would
reduce inflation and slow down growth, and therefore
reduce income. Greece and Spain have weak
economies – a lower interest rate would increase
growth and inflation, raising income. Different interest
rates would therefore reduce inequality.
AD/AS diagrams, showing how interest rates that
are too low in Germany cause inflation to be too
high and fuel growth / income, where interest
rates that are too high for Spain cause too little
growth and therefore low income

49
The burst of QE in Jan 2015 should
help to increase income in Spain
and Greece, thus reducing the gap
with Germany
All Euro Area countries are part of
the EU’s Single Market, which
allows free movement of labour –
the unemployed in Spain / Greece
could technically move to richer,
growing areas in search of work
One-size-fits-all has been focused
on helping the weaker economies –
with the interest rate at the very
low 0.05%, it is already focused on
supporting growth in countries
such as Greece and Spain, reducing
inequality
The one-size-fits-all approach could worsen inequality but in recent years the ECB’s focus has been on supporting
growth in weaker economies rather than generating growth in strong economies

You MUST write about both
groups of people – you may
need different policies for each
group!
You need to come
up with 3 of your
own SPECIFIC ideas
This means that the
evaluation must focus on
whether the suggested
policies actually work – no
good having vague
evaluation!
Discuss the likely effectiveness of possible policies
that the UK gov’t could use to incentivise the
economically inactive and unemployed into work.
50

50
Providing free or subsidised childcare could help non-working parents (i.e. economically inactive) of young
children into work
In the government’s 2015 Budget, George Osborne promised to raise the number of free hours of childcare
from 15 to 30, to help parents be able to work
The cost of childcare can be so high that it can leave
working parents with little income – providing free
childcare makes work more financially attractive, and
also equips pre-school children with a strong start to
their education so they are less likely to be unemployed
themselves in the future. This policy also creates more
jobs in childcare.
AD/AS diagram showing an increase in both AD and
LRAS

50
Parents may not choose to go to
work when their children are in
childcare – may not be part-time
jobs available that fit in with the
nursery’s available hours, or may
not have the skills for the jobs
available
There may not be enough trained
childcare staff to keep nurseries
open for the offered 30 hours per
week – and the 30 hour per week
scheme is only in term-time, not
school holidays
This scheme incurs a huge financial
cost to the gov’t, which could be
better spent on supporting other
economically inactive people, such
as the disabled, into work
Whilst offering free childcare sounds like a simple way of encouraging parents to work, there are a number of
logistical challenges that might make the scheme fail and not encourage economically inactive parents into work

50
Making labour markets more flexible
Greater availability of part-time jobs, zero-hours contracts, home-working, flexi-time etc
With flexible labour markets, the unemployed might be
more likely to find a job that suits their availability and
skills – this could incentivise them to work rather than
rely on benefits. This policy is also relatively quick and
cheap for the government to implement, so could tackle
unemployment very quickly.
Possible labour market diagram showing an increase
in elasticity of labour supply

50
Some flexible working practices
may leave the unemployed more
vulnerable e.g. zero-hours
contracts may mean that they
cannot claim any benefits even if
no hours are available – this will
not incentivise them to work
Home-working is often only possible
in jobs that require some skill, and
once “trust” has been built up with
the employer – may also require
good broadband and IT kit at home,
which may not be possible –
therefore no good for some people
May fail to address the root causes
of the unemployment e.g. ill
health, poor skills etc
Flexibility may be suitable for some unemployed people and may incentivise them to work, but it will not work for
all unemployed people, who may face other barriers to work

Additional Activities
51
Data handling – comparing the UK to other economies
Evaluating quantitative easing
Evaluating inflation targeting, bank taxes, NLW and FFL
Prospects for the UK economy – more detail
Tackling specific UK economic problems
Short Run and Long Run Phillips Curves

Have a safe journey home!
Good luck with your exams
from everyone at tutor2u
www.tutor2u.net/a2econ2016.pdf

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A2 econ session 5

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