UK Economic Miracles?

In the 1980s, The UK introduced many supply side policies such as privatisation, deregulation, and reform of trades unions. The government also cut the higher rate of income tax from 80% to 40%. It was hoped that these supply side policies would create a productivity boom. The government argued this reinvigoration of the British economy would enable a faster rate of economic growth, and overcome the years of under achievement.

The Lawson Boom – The Miracle that never was

In the late 80s, economic growth reached 5% and the Thatcher government started to believe that it had succeeded. It was the era of the Lawson boom; confidence was high, house prices rising and a new feeling of wealth was almost visible (especially in the south) Newspapers and not just the government started to talk of an economic miracle. However, the ‘economic miracle’ was short lived the fast pace of growth caused the economy to overheat. As a consequence, inflation rose to 11% and the government were forced to raise interest rates in an attempt to reduce inflation. The Lawson boom was soon over and the UK was left with a pretty bad hangover: growth fell in 1992, unemployment rose to 3 million, and house prices plummeted by 15%.

In the 1990s, there were more supply side policies introduced; these included more privatisation, the New Deal and reforms to the tax and benefit system.

These supply side policies have helped to enable the UK to grow at a slightly faster rate, without inflation. Economic growth has averaged 2.6% since 1992 and inflation has stayed low. In a way you could argue that this is the real economic miracle. For so long the UK has suffered from a boom and bust economic cycle, but, now this has been avoided. Who is to credit though?

However, the increased productivity is not just due to government supply side policies. There have been many global factors enabling lower costs and increased productivity. For example, improvements in technology (internet and development of computers); Globalisation and increased competitiveness; and increased free trade.

Also the MPC has played a vital role in maintaining stable economic growth.

To Conclude

Supply side policies have had some positive impact on the UK’s economic performance. However, it is only a small gradual improvement. ‘Miracles’ are quite unlikely in a modern developed economy like the UK.

With the recent strength of the UK economy we can give some credit to Conservative supply side policies of the 80s and 90s. However, I would suggest it is only quite a small factor. Also, improved productivity is not the only issues; some may argue the free market supply side policies introduced in the 1980s have served to increase inequality within British society – an undesirable side effect.

The Great Moderation

From 1994-2007, the UK experienced the longest economic expansion on record. Furthermore, this growth occurred without inflation. It appeared we had finally broken spell of boom and bust. Unfortunately, this low inflation masked a boom in asset prices and lending. The Credit crunch of 2008 led to the UK experiencing the deepest recession since the 1930s.

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