4.5.4 Macroecnomic policies in a global context

• Macroeconomic policies


  • Fiscal policy
  • Monetary policy
  • Exchange rate policy
  • Supply-side policies
  • Direct controls
• Measures to reduce fiscal deficits and national debts

  • Less government spending
  • Higher taxes
  • Promote economic growth
  • Issue government bonds
  • Default on debt
• Budget deficits could be reduced with less government spending and higher taxes, but this could lead to lower economic growth and discourage people from working
• Economic growth could be promoted to help reduce a deficit, but this is not effective if the government has a structural deficit
• Governments can issue bonds to raise finance, but this is not considered an effective long term solution to eliminate government debt
• Governments could choose to default on their debt if it is no longer manageable, but this can make accessing credit in the future difficult
• Countries that have used measures to reduce debt

  • Sweden
  • Saudi Arabia
• Measures to reduce poverty and inequality

  • Income redistribution
  • Wage equality
  • Progressive taxes
  • Minimum wage
  • Improve human capital
  • Diversify economy
• Sustained economic growth has helped reduce poverty in Britain by redistributing wealth to the poorest
• Countries that have reduced poverty through economic growth

  • China
  • India
• Progressive taxes can reduce incentives to work harder and earn more, and result in a fall in government revenue
• The US has a progressive tax system but an ineffective welfare state, while Scandinavian countries have a less progressive tax system but more effective redistribution
• The UK National Minimum Wage aims to prevent employees exploiting workers by paying low wages and prevent people falling into extreme poverty
• Developing countries can improve human capital and diversify their economies to stimulate growth and job creation
• Changes in interest rates and money supply

  • Low interest rates
  • Quantitative easing
• Governments have used low interest rates and quantitative easing to try and stimulate the economy, but this can lead to higher inflation
• International competitiveness


  The ability of a nation to compete successfully overseas and sustain improvements in real output and living standards
• Generally, the cheaper the relative unit labour costs, the more competitive the country in manufacturing
• China has previously used currency manipulation to increase their international competitiveness by devaluing the Renminbi
• Unit labour costs rise when wages increase faster than productivity
• The UK government has tried to increase competitiveness by lowering corporation tax and simplifying regulation
• Due to globalisation, economic shocks in one part of the world affect many countries
• Shocks in the global economy accounted for about 2/3 of weaknesses in UK output after the financial crisis
• The UK MPC reacted to the Eurozone decline by lowering interest rates and using quantitative easing
• The UK government introduced the Funding for Lending Scheme to support UK banks facing higher funding costs due to worsening conditions in the Eurozone
• Transfer pricing


  The price of transactions between companies in the same multinational group
• Transnational companies can allocate profits to countries with low tax rates to reduce the amount of tax they pay
• In the UK, HMRC challenges companies which do not allocate sufficient profits to the UK in accordance with rules, securing billions in tax revenue
• The tax rules are complex and difficult to apply and regulate, and there could be high costs for HMRC to challenge firms
• Problems facing policymakers


  • Inaccurate information
  • Risks and uncertainties
  • Inability to control external shocks
• Policies might be decided without perfect information, requiring assumptions and cost-benefit analysis
• Consumers can react in unexpected ways, undermining government policies
• External shocks like the financial crisis can make government policies ineffective