Civil Engineering Reference
In-Depth Information
between both arms of macro policy, in practice this was often not the case. The
1997-2010 Labour government took pride in the levels of stability that followed
the introduction of the new monetary regime in 1997. The coalition government
that came to power following the May 2010 election set up the
Office for Budget
Responsibility
(OBR) to make independent assessments of public finances. These
two changes have resulted in a greater clarity of roles and responsibilities between
the Bank of England and the Treasury.
Direct Policy
Many other government economic policies tend to be more 'objective specific'
compared with the broad macro fiscal and monetary policy options we have
considered so far. We refer to these instruments as
direct policy
, but it is also known
as direct control or direct intervention. A feature of this type of policy is that it tends
to have less impact on overall market prices than the broad macro changes to tax or
interest rates.
Direct policy tends to be of a legislative nature. Conventional economic
textbook examples include legislation designed to control prices, wages or imports
to assist with the stabilisation of prices and trade; legislation to support research
and development, education and training to influence long-run growth; and general
support to encourage small businesses. Good examples of direct policy within the
area of construction economics include building regulations and codes established
to raise the quality and performance of finished products, and the Strategy for
Sustainable Construction (HM Government 2008) introduced to change cultural
attitudes towards productivity, safety and the environment. These initiatives are
aimed at stimulating growth, stability and environmental performance within the
construction sector.
MACROECONOMIC OBJECTIVES AND POLICY
Effective macroeconomic management is not an easy task. The basic objectives and
policies are summarised in
Figure 12.1
(see page 210). A finely tuned macroeconomy
is elusive. There are trade-offs to be made between one objective and another, and
one policy and another. As a consequence, there are no magic formulas or miracle
cures that economists can agree on. There is instead vigorous political debate that
highlights the difficulties that lie behind the management of the macroeconomy.
Let us briefly consider one example of macroeconomic instability. The financial
crisis that troubled economies across the world from 2008 to 2012 was triggered by
instability in the US financial markets in mid 2007. However, the crisis soon spread
across the world, with serious implications for the UK and beyond. The international
financial system came close to collapse in the autumn of 2008, following the failure
of Lehman Brothers, and the subsequent panic across global markets prompted
unprecedented action by central banks. For example, the Bank of England cut the
official rates of interest several times and supplied billions of extra funds as it tried to
stabilise the financial system.
Despite these monetary policy initiatives, banks and building societies (the
lenders) raised the cost of borrowing and restricted the supply of loans in their
