The United Kingdom of Great Britain

Fiscal & Monetary Policy in the United Kingdom

Normal 0 false false false EN-US X-NONE X-NONE MicrosoftInternetExplorer4 /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-qformat:yes; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin-top:0in; mso-para-margin-right:0in; mso-para-margin-bottom:10.0pt; mso-para-margin-left:0in; line-height:115%; mso-pagination:widow-orphan; font-size:11.0pt; font-family:"Calibri","sans-serif"; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:"Times New Roman"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin;} Fiscal policy and Monetary policy are both used by government to try and keep an economy running smoothly. These two types of government stimulation fall under the Keynesian style of economics. This style of economics applies to those who believe government stimulation is necessary to keep an economy afloat. Keynesian economists believe that doing nothing to a struggling economy will not help it. In fact, many Keynesian economists believe that doing nothing will dig the hole deeper at an exponential rate. For Keynesian economists, Fiscal and Monetary policy was born. This section of this website will look at how these two different styles of policy both play a key role in how the government of the United Kingdom spends its money to help the economy run smoothly. Specific examples of what is going on right now will also be looked at for each type of policy. Before we can look at the specific examples however, we need to know exactly what it is we are trying to see. In order to do this we need to know a little about Fiscal and Monetary policy.

Fiscal policy deals with legislation and bills that have an effect on the economy. Fiscal policies are very effective but come with some drawbacks. The first one of course is lags. Things like a wait and see lag where economists see a problem and try and wait it out to see if it fixes itself costs time, and time is money. Another lags is the legislate lag. This is essentially the time it takes to pass a bill through the government, and also the time it takes for that bill to be effective. Other lags exist as well, but the point of the matter is that fiscal policy is effective but takes a long time to implement. Because of all of these lags there are times where and expansionary policy comes in so long after it is needed that it actually hurts the economy that recovered through other methods or on its own. Fiscal policy is most effective when these lags can be eliminated. An example of this can be seen in the United States with the Obama Stimulus package. The package cuts taxes more so than any other package in U.S. history. This will give the citizens of the United States more money to have on them and should increase spending to fix the economy. This is of course only true if people spend the money.  This leads to the other downfall of fiscal policy. In Monetary policy the Bank of England works with banks to help them give loans. When someone takes a loan they will spend it so worrying about them not spending is not much of an issue. In fiscal policy however, if people do not trust the economy they will not spend. People have been sitting on their tax cuts all across the country and in other countries as well because they do not trust the United Kingdom's government enough yet. The people of the United Kingdom fell that the government will not fix the problem and that they will need their money. The result is a wasted tax cut because people who refuse to spend ultimately hurt the economy.

On the other hand, Monetary policy deals with changes in things like interest rates of banks and the supply of money to the economy through those banks. The Bank of England, which is very similar to the United State's Fed, is the central bank that works directly with the other banks in order to help the economy. The Bank of England works with the other banks of the United Kingdom very similarly to how the United States Fed works. By changing the money supply and interest rates the Bank of England is able to react very quickly to changes in the economy. The problem comes when banks are given interest rate cuts or reserve rate cuts, and they sit on the money.  If banks do not supply the money as loans then people cannot spend it and cannot help to fix the economy. This is one of the few issues with Monetary policy. One example of how Monetary policy would work would be something like a change in money supply. In an economic recession the Bank of England would want to lower the interest rates and the required reserve rates of banks. This would give banks more money to have for themselves and therefore more money to loan out. If the money gets loaned out then the public spends it, ultimately helping the economy. If the economy needed to be pulled back because it was expanding too quickly and causing inflation then the Bank of England would respond by increasing interest rates and required reserves, slowing the money flow and helping the economy in that respect. In times of a recession, as is the current situation, expansionary policy is needed.