Chapter 12 Domestic Economy November 2005 Xiao Huiyun

Chapter 12 Domestic Economy

November 2005Xiao Huiyun

A1 IntroductionA1 Introduction

Britain’s ‘mixed economy’ – an economy in which there is some public ownership as well as privately owned business

During the 20th cent. the government has become involved in the economy through introduction of social welfare policies and laws to regulate industrial relations

In 1945 to ensure full employment, labour govern. began to nationalise key industries such as coal, steel and transport.

A 1 Introduction contchanging of winds

A 1 Introduction contchanging of winds

By the end of the 1970’s Margaret Thatcher had started to sell back those industries to the private sector, to beat inflation, which was her primary objective.

“ In politics if you want anything said, ask a man. If you want anything done, ask a woman” Margaret Thatcher

A 2 Natural Resources & Infrastructures

A 2 Natural Resources & Infrastructures

Highly developed & efficient main road and rail network and airports-- excellent infrastructure pp 203-204

Natural resourcesPrincipal resources at present -- oil and gas in the

North Sea, on the coast of ScotlandLarge amount of coal, but has been kept for future useManufacturing still playing important roleServices, industries such as chemicals, electronics, etc

all doing well, important parts of British economy

A 3 FinanceA 3 Finance

Importance of institutions of City of London cannot be over-emphasised

known as the world’s leading international financial centre

Over 550 international banks and 170 global securities houses have offices in London

BANKING

A 3 FinanceA 3 FinanceFOREIGN EXCHANGE The London foreign exchan

ge market is the largest in the world, with daily turnover of $504bn in April 2001, accounting for 31% of global turnover, more than New York and Tokyo combined.

A 3 FinanceA 3 Finance London is the world's largest fun

d management centre, with $2,460bn of institutional equity holdings in 1999. Assets managed in the UK on behalf of domestic and overseas clients totaled over £2,800bn in 2000. London is the leader in the management of overseas clients non-domestic portfolios.

FUND MANAGEMRNT

A 3 FinanceA 3 Finance SECURITIES DEALING

The number of foreign companies listed on the London Stock Exchange is second only to New York. In the first eight months of 2002, turnover in these companies booked in London accounted for 56% of all trading in foreign companies around the world. Turnover in euro-area stocks accounted for nearly two thirds of all foreign equity trades booked in London. London is the major centre for the international bond market. London-based book runners accounted for about 60% of international bonds issued, with 70% of trading in the secondary market, including euro-denominated issues, also based in London.

A 3 FinanceA 3 Finance

The financial institutionsBanksBuilding societyInsurance companiesStock exchange

A 4 The “Mixed Economy “ A 4 The “Mixed Economy “ Private Enterprise -- enterprises other than those nationalise

d/public ones.Different forms of business organisation – Single Proprietorshi

ps, Partnerships, Co-operatives, Joint-stock companies pp 205 – 206

Limited Liability means that an investor’s liability to debt is limited to the extent of their shareholding. That is to say that if a person owns 100 £1 shares in a company, in the event of its going bankrupt, then the most he can lose is the £100 originally invested.

A 4 the Mixed Economy cont


Some possible or potential advantages and disadvantages of the various types of company organisation include:

The single proprietorshipSuch businesses are easy to set up and the owner can easily

maintain full control. However, because of the limited amount of capital that owners can raise for themselves, such businesses are usually small. Moreover, as owners have to take all the legal and financial responsibilities themselves, in today’s strong competition, the single proprietorship is no longer of so much importance in the UK.



Partnerships– Such businesses can raise larger amount of

capital and, consequently, are greatly bigger. Partnerships, however, suffer in the same way as do single proprietorships in that each partner is legally liable for all the debts of the firm, even if they have been incurred by the activity of another partner.



Co-operativesSuch businesses operate mainly in the retail trade. T

he most distinctive feature of co-operative societies is that they belong, in a sense, to some of their customers who pay a minimum deposit on a share in the business. Consumer co-operatives have proven to be rather vulnerable in the face of the intense competition from other types of organisation.

A 4 The Mixed Economy cont


Joint stock companies Such businesses make large amounts of capital mu

ch easier to raise. For these companies, transfer of ownership can take place with a minimum of formality. In other words, shareholders can sell their shares to anyone else. but there also lies a risk here. Some unscrupulous company promoters may fraudulently try to raise funds for their own ends from the public. (Source: An Introduction to the UK Economy by Harbury and Lipsey )



Nationalizationthe acquisition of private companies by the public sec

tor

Privatizationthe return of state enterprises to private ownership a

nd control



Why nationalise? The post-war Labour government was elected on a socia

list manifesto (see also Chapter 11 ‘Welfare’), which promised more political control over the major public utilities so that their development could be guided in the public interest rather than simply for private profit

Those industries which were nationalised had managing directors appointed by the government and, whilst they were left to run their own affairs on a day-to-day basis, they were accountable to the government concerning more long-term policy.



Reasons for nationalizationNatural monopolyExternalities

e.g. subsidizing public transport (London Underground) may be a second-best option to road pricing.

Equity or distributional consequencese.g. protecting transport in rural areas

Co-ordinating a networke.g. British Rail could have an overview of the whole rail system

A 4 the Mixed EconomyA 4 the Mixed Economy

Why privatise? The main argument used by the ‘privatisers’ is that nationalised in

dustries are economically inefficient, when compared to companies operated under private commercial influences. As mentioned above, the Conservative governments of the 1980s regarded decreasing state involvement in the economy as a key component of their policies

This would enable private companies to compete in a free-market environment, where consumers of goods and services decide what is useful or desirable. Prices should be determined by what people are willing to pay, rather than based purely on cost.



Reasons for privatizationImprove incentives for production efficiency

makes managers accountable to shareholders.but sheltered monopolies will be sleepy no matter who owns

themso privatization will be most successful where there is

potential for competition.Pre-commitment by government not to interfere for

political reasons

Potential or possible advantages of privatisation


It gives ordinary people a direct stake in the nation’s means of production and distribution.

It frees those responsible for the industry concerned from the constraints imposed by State ownership, including governmental intervention in day-to-day management, and protects them from fluctuating political pressures.

It releases those industries from the restrictions on financing which public ownership imposes (i.e. they could now raise money in the City instead of only from the Treasury).



Access to private capital markets makes it easier to pursue effective investment strategies for cutting costs and improving standards of service.

The financial markets would be able to compare the performances of individual sectors of a privatised industry against each other and also against those of other sectors of the economy, thus providing a financial spur to improved performance.

A system of economic regulation would ensure that the benefits of greater efficiency were passed on to the public in the form of lower prices and better service.

Potential or possible disadvantages of privatisation


In effect, privatisation is simply selling back to people what was already their own property.

Were the government to allow the managements of nationalised industries a genuinely free hand to run them on proper business lines, there would be no need to privatise them. Most, if not all, of the advantages cited above could be achieved perfectly well without privatisation



There is not the slightest evidence that widening the number of people shares has any effect on political attitudes or labour relations. In reducing strikes or raising productivity, such factors as better management and better arrangements for collective bargaining, have far more relevance.

The true weight of the supposed ‘co-ownership’ is very, very light. As one financial writer observed: If all these worker-shareholders decided to sell their entire stock (of a company) on the same day, ‘it is doubtful whether it would even register on the Stock Exchange’.

A 5 The Role of the Government

A 5 The Role of the Government

Taxation & Government Expenditure Despite the different attitudes towards nationalisation, go

vernment influence in the economy has grown during the twentieth century. (see graph on p 207)

During the two World Wars, the proportion of income from economic activity devoted to government expenditure not surprisingly showed sudden increases, to reach a peak of 46 per cent in 1918 and 61 per cent in 1942 to 1944. However, although the proportion fell back after each war, in each case it never went back to its pre-war level.

Taxation & Government Expenditure


Throughout the 1980s and early 1990s, an aim of government policy was to reduce the share of public expenditure of GDP and the proportion fell from 46 per cent in 1981 and 1982 to 38 per cent in 1983. There was a slight rise in the early 1990s during the period of economic downturn, but in 1998 the proportion had fallen back again to 39 per cent.



Where does the government get its money from?

Stock exchangeTaxation -- Direct and Indirect TaxesDirect taxes – national insurance contributions,

income tax (a ‘progressive taxation system), corporation tax (paid by companies)



Indirect taxes -- VAT (VAT was introduced following Britain’s membership of the EEC: a percentage of the money raised is contributed to the European Union budget.) , duties on alcohol, tobacco, petrol, etc.



Government spending Some of the main areas of expenditure for 1999-2000 were:

social security £102 billion (29% of total)health £61 billion (17%)education £41billion (12%)defence £21 billion (6%)

GDP GrowthGDP Growth

GDP Growth Average Earning

A 6 ConsumerA 6 Consumer

Since 1971 household expenditure has increased in real terms in all the broad categories of expenditure with the exception of tobacco

Some categories of goods and services have grown faster than others. For example, spending on financial services and UK tourists’ expenditure abroad was almost five times and almost six times higher respectively in 1999 than in 1971.

In contrast, expenditure on food increased by only a quarter in real terms over the period.

A 6 ConsumerA 6 Consumer

Look at the table “Student’s expenditure” on page 210British students have very specific spending patterns. Accor

ding to the Student Income and Expenditure Survey, around half of the expenditure by students under the age of 26 in higher education in 1998/99 was on what could be termed “essential items”, such as accommodation, food, bills and household goods and course expenditure. Students now pay a larger contribution towards their tuition, so from 2000 the course expenditure would be a higher percentage, but it is still mostly paid for by the government, Students who lived at home with their parents spent on average a quarter of the amount on housing of that paid by students living independently as they were subsidized by their parents.

Credit Card RevolutionCredit Card Revolution

Consumer Protection guaranteed by the Consumer Protection Act

The Credit Card Revolution leading more to Debt Problem

The Bank of EnglandThe Bank of England

Whilst all the important institutions mentioned so far are privately owned commercial bodies, the Bank of England is not. It is the central bank of the UK — a nationalised industry operated on behalf of the government.

The Bank of England controls the currency and acts as banker both to the government and to the commercial banks. It also plays a key role in the government’s monetary policy.

It aims to maintain the integrity and value of the currency, maintain the stability of the financial system and ensure the effectiveness of the financial services sector.

The Bank of EnglandThe Bank of England

The Bank of England has a monopoly of the bank-note issue in England and Wales, though certain banks in Scotland and Northern Ireland have limited issuing rights.

Fundamental changes to the Bank’s role took effect under the Bank of England Act 1998. In particular it acquired operational responsibility for setting interest rates.

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Chapter 12 Domestic Economy November 2005 Xiao Huiyun