The Impact of Government Policies on the UK Economy

Government policies are principles and measures by which a government attempts to influence the economy. Examples are fiscal policy, monetary policy, and trade policy. In the UK, His Majesty’s Treasury (HM Treasury), the government’s economic and finance ministry, is responsible for formulating economic policies, controlling public spending, and ensuring economic growth. The UK had a Gross Domestic Product (GDP) of $3.7 trillion in 2022, the sixth-largest economy after the U.S.A., China, Japan, Germany, and India.

The services sector includes the financial, entertainment, and retail industries, which make up 80% of the UK’s GDP. Currently, the UK faces high inflation and the after-effects of the coronavirus on the economy. Besides the GDP and inflation rates, banks and investors use other economic indicators to determine a country’s performance. Below is a list of economic policies that change the economy of the United Kingdom.

1. Fiscal Policy

Fiscal Policy is a powerful tool the government uses to ensure economic growth and stability. The government makes use of taxation and its spending to regulate the economy. Fiscal Policy UK focuses on debt, some aspects of government borrowing, and welfare spending caps. Some TradingView traders factor in fiscal policies when making fundamental analyses. The fiscal targets for the UK are:

• For public sector net debt (excluding the Bank of England) as a percentage of GDP to be falling by the fifth year of the Office for Budget Responsibility’s (OBR) forecast (2027/2028).
• For the public sector, net borrowing will not exceed 3% of the GDP by the fifth year of the OBR’s forecast.
• To ensure that spending on welfare is contained within a predetermined cap set by the Treasury.

There have been modifications to the fiscal policy to focus on taxation, government debt, borrowing, and spending management. It has resulted in current tax rates ranging from income tax, value-added tax (VAT), and corporate taxes to others. The fiscal policy has long-term goals for economic growth and managing inflation. Recently, there has been moderate growth and slowed housing price growth.

2. Monetary Policy

This is a set of actions that regulates a country’s overall money supply. The strategy involves reviewing interest rates and changing bank requirements. The monetary policy aims to control inflation, unemployment, and interest rates. There are two types of monetary policy:

• Expansionary monetary policy lowers interest rates, discourages saving, and encourages borrowing and spending during a recession period.
• Contractionary monetary policy increases interest rates, limits the supply of money, decreases inflation, increases the price of goods and services, and reduces the purchasing power of money.

The Bank of England (BoE), the central bank of the United Kingdom, sets monetary policy eight times a year. The monetary policy ensures price stability by targeting an annual inflation rate set by the UK government at 2%.

With the current inflation rate at 6.7%, things are still recovering in the economic sense. Firstly, the effects of the COVID-19 pandemic led to higher prices of goods and a fall in the number of available workers. Secondly, the impact of the Russian invasion of Ukraine led to an increase in the prices of food and gas.

The BoE decided to keep the interest rate, or bank rate, at 5.25%. The inflation rate has fallen, and we expect it to keep falling by the end of the year.

3. Trade Policy

This refers to the rules and regulations for buying and selling goods and services between two or more countries. It involves tariffs, export quotas, and restrictions on international trade.

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The UK has over 70 trade agreements in place. Examples are the UK-Australia Free Trade Agreement, the UK-New Zealand Free Trade Agreement, the Singapore Digital Economy Agreement, and the Japan Comprehensive Economic Partnership Agreement.

Brexit, derived from the words ‘British’ and ‘exit, refers to the decision to leave the European Union (EU) on January 31, 2020. Brexit occurred because of problems in the policy, and a referendum was called between the UK and EU on June 23, 2016. Brexit hurt the economic growth of the UK, causing the British pound to fall to its lowest level against the dollar in 30 years.

Other government policies that affect the UK economy are austerity measures under fiscal policy. The government uses industrial policies like grants or subsidies to strengthen domestic industries to ensure medium and long-term economic growth and stabilisation. Employment and labour policies in the United Kingdom include types of workers, workers’ rights, overtime, and contract changes. It involves housing, environmental, welfare, health, and social care policies.

The government makes policies to ensure positive effects on the economy. A few examples of governmental policies in the UK are fiscal, monetary, and trade policies. They aim to control economic growth, stability, and inflation. While economic policy shifts may have negative effects on the economy, they aim for positives in the medium or long term.