4.5.4 Macroeconomic Policies in a Global Context

• Measures to Reduce Fiscal Deficits and National Debt

  • Contractionary fiscal policy, but may disincentivise people from working
  • Promote economic growth, but this is ineffective in a structural deficit
  • Issue bonds to raise finance and avoid raising taxes, but this has to be repaid eventually
  • Government can default on their debt, but this reduces access to credit in the future
• Measures to Reduce Poverty and Inequality

  • Use of progressive or wealth taxes, but this may disincentivise people from working
  • Raising the national minimum wage
  • Improve human capital
  • Diversify the economy
• Changes in Interest Rates and the Money Supply


  • Lower interest rates stimulate growth by encouraging spending and investment
  • Quantitative easing increases the money supply which increases growth but may lead to higher inflation
• Measures to Increase International Competitiveness


  • Reduce relative unit labour costs by introducing part-time and temporary contracts
  • Lower corporation tax e.g. the UK lowered corporation tax to 20% in 2015 to increase investment
  • Competitive devaluation can be used to lower relative export prices
  • Reducing regulation makes it cheaper for firms to comply so attracts more investment
• Problems Facing Policymakers


  • Inaccurate information
  • Risks and uncertainties
  • Inability to control external shocks
• Inaccurate Information

  Information gaps or a lack of perfect knowledge mean that some policies may require a full cost and benefits analysis which can be time-consuming and expensive. However, it is impossible to obtain all information so assumptions must be made.
• Risks and Uncertainties


  There may be unintended consequences if consumers and firms behave in unexpected ways thus there may be a large cost if the policy is not as effective as it was planned to be
• Inability to Control External Shocks


  Policies already implemented by the government may have highly adverse effects depending on the severity of a shock and it is difficult to properly assess the costs and benefits of policies in dire crises e.g. the 2007 Financial Crisis
• Measures to Control TNCs


  HMRC can challenge a firm to ensure it has allocated a sufficient amount of profits to the UK and tax it accordingly, but this is expensive and there is a significant time lag for investigating.