Introduction – UK Economy Under Labour

This report aims to examine the successfulness of the economic policies and strategies used by the Labour government since they came to power in 1997. Their use of fiscal, monetary and other policies helps to control the economy, and this investigation looks to what extent these strategies have met with the government’s aims for a stable, growing economy.

In years previous to their election to power, the economy had experienced a series of cycles, dubbed the ‘boom and bust’ economic cycle. On Graph 1 below, this can be seen in the fluctuations in GDP (output of the economy) over the period 1980 to 2006.

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GRAPH 1: The Economic Cycle: UK Economic Growth 1980 – 2006

A pattern of high, unsustainable economic growth, followed by a sharp slowdown before a recovery and a restarting of the cycle (see Graph 2). Primarily, the strong growth created excess demand and demand pull inflation. Treating this required high interest rates which cut spending. Allowing growth to become extreme meant that the slowing effect of interest rates also needed to be severe.

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GRAPH 2: The Economic Cycle: The cycle and overall growth

Unemployment rose during recessions, cutting family’s disposable income, living standards and often forcing them onto benefits. Less tax revenue, as a result of lower business profits and less spending power, and this increased state expenditure is an undesirable burden for the government. For business, a volatile economic environment means they cannot plan with certainly when looking to the future. If their plans may fail to be successful they will not risk investing capital, so our economy will suffer further as firms are afraid to expand – limiting growth.

While over time, the cycle led to increases in economic growth overall (Graph 2), the volatile process was hard for individuals and business alike and the trend of growth had the potential to be higher if the economy was more stable.

As a result, the Labour government pledged to remove the pattern of cyclical instability from our economy, with new objectives for stability.

For many observers, the nature of the how well the economy has been managed can be assessed against four main economic indicators. It is these indicators which form the government’s objectives to maintain a stable, prosperous economy, without the boom and bust pattern.

To fulfil their pledge, the government hoped to…

• Create stable and sustainable economic growth – Allows businesses to plan ahead and invest
• Achieve low, stable inflation – Again, businesses can plan ahead in an economic climate which is stable. If inflation gets too high bringing it down again can be another painful economic experience.
• Get as near to 100% employment as possible – More tax revenue and less benefits spending for the government, plus is a more efficient and productive use of the nation’s human resources – should create more economic growth.
• Reach a positive balance of payments – A strong balance would mean our goods were demanded abroad and allow for increased production, efficiency and growth. Fewer imports may also create more UK employment.

They hoped that these would allow business to invest the economy to reach a state where it created continued prosperity for all.

However, these objectives are very difficult to achieve simultaneously. For example, traditional theories say there is a trade-off between inflation and unemployment shown in the Phillips Curve (Diagram 1).

Phillips Curve

DIAGRAM 1: Phillips Curve

To fulfil the aims they have used a variety of macroeconomic tools, however this has largely been limited to fiscal controls, with monetary policy handed over to the independent Bank of England.

Please note that this was written during Summer 2008, before the worst of the economic problems of the following months