Civil Engineering Reference
In-Depth Information
Figure 12.1
Government objectives and government policy
Objectives
Policies
Stable Prices
Fiscal Policy
Full Employment
Sustained Growth
Monetary Policy
External Balance
Direct Policy
Protect the
Environment
efforts to remain solvent. In other words, interest rates available to borrowers
increased across the financial sector (despite all efforts by the central banks to lower
them). This action was unprecedented as the usual practice (outlined in
Chapter 14
)
was for changes in interest rates on mortgages and loans offered by retail banks to
move in exactly the same direction as changes made to the official rate - and usually
on the same day. Post 2008, however, institutions in the financial market were less
quick to change their rates and less inclined to mirror changes in the official rate.
They began to revise their margins and increase the costs of borrowing to move to a
new equilibrium.
As a result, consumer spending and business investment was cut back - and
this, in turn, reduced demand for goods and services. This cut into business profits
leading to job losses. Increases in unemployment typically put a strain on the fiscal
stance as the unemployed no longer pay income tax (reducing government revenues)
and receive benefits from the state (increasing government spending). Lower
business profits also reduce government revenues received through corporation tax.
The
public sector net borrowing
- the government's annual deficit - consequently
increased. In turn, this provoked a debate about the need to cut back government
spending in other areas, leading to further unemployment. As output falls, then
obviously economic growth slows down. Yet, as economic growth declines, there is
the possibility of relatively less environmental damage.
This period of economic instability emphasises the complex nature of the macro
economy, the incompatibility of some government objectives and policies, and the
global nature of macroeconomic interaction. A further point of complication is
the fact that few policies have an immediate effect. Monetary decisions are taken
monthly and fiscal decisions are effectively only made annually in the government's
Budget, and the policies that are executed can take years to play out.
