1. EC-111 British Economy
Recent UK Macroeconomic
Trends
Dr Catherine Robinson
F26, Richard Price Building
Office Hours: Mondays 10.30-11.30 and Thursdays 9.30-10.30
Appointments: c.robinson@swansea.ac.uk

2. Margaret Thatcher (1925-2013)
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3. Today…
 We begin from 1997-ish
 Focus on the changes that the New Labour Government
brought in
 Institutional changes
 Policy focus
 What did the UK look like?
 Employment, prices, balance of payments, economic
performance?
 What about macro policy?
 After leaving the ERM, what filled the void?
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4. Post ERM For the rest of Europe, it was business as usual
 A strong belief in a stable European currency, pegged to the
German Deutschmark
 Not all plain sailing; Spain had to devalue also but remained
in, Italy left and then rejoined
 For the UK, a medium term framework was still viewed as
important
 Successful because it influenced expectations
 A clear-cut policy stance allows for planning
 A belief that stable and predictable policy will lead to longer
term prosperity
 INFLATION TARGETING
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5. Inflation targeting continued
 1995 – 2.5% inflation became THE target
 Bank of England required to produce a quarterly report – the Inflation Report
 Contains charts, forecasts and general information on the performance of the economy
:
 Money, interest rates and exchange rates
 Demand and output
 The labour market
 Costs and prices
 (Monetary policy)
 Prospects for inflation
 Minutes from MPC meetings
 The first real Inflation Report of the Labour Government is still available online:
 http://www.bankofengland.co.uk/publications/inflationreport/ir97aug.pdf
 Subsequent ones are also available…here’s the link to the latest…
 http://www.bankofengland.co.uk/publications/inflationreport/ir13feb.pdf
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7. New Labour innovations
 Election in May 1997 saw:
 Hangover hair….
 Bank of England independence
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8. Bank of England
Independence
 1998 Bank of England Act
 Made the Bank accountable to parliament and the wider public –
(NOT the government)
 In extreme circumstances, the government can instruct the Bank
for short periods of time
 Responsibility to set interest rates
 Creation of the Monetary Policy Committee
 Who set the interest rate
 Objectives of the BoE:
 To deliver price stability
 To support the government’s economic objectives for economic
growth and employment
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9. But the Chancellor still sets the
parameters..
 Identifies the target inflation rate in his annual budget
statement
 Currently set at 2% (previously 2.5%)
 Too low inflation seen as a problem as much as too
high….take now for example
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10. The MPC – June 2011

11. Current MPC (2013)
 Sir Mervyn King, Governor
Charles Bean, Deputy Governor
Paul Tucker, Deputy Governor
Ben Broadbent
Spencer Dale
Paul Fisher
David Miles
Ian McCafferty
Martin Weale
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12. Monetary Policy Committee
 Experts in the field of economics and monetary policy
 Independent
 Each member has a vote to set the interest rate at a level they think will best
achieve the target level of inflation
 One person, one vote
 Treasury representative sits in
 May discuss issues, but doesn’t vote
 To ensure the MPC is fully briefed on current fiscal policy and other aspects of
government policy
 Feeds back to the Chancellor
 Meet monthly, but receive Bank briefing throughout
 Half-day meeting – pre-MPC on the Friday before the setting
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13. Meetings
 2-day meetings
 Begin with an update of recent economic data
 Identify issues for discussion
 Day 2 – MPC members explain their position
 Governor puts his favoured view to the meeting
 One which he thinks has the greatest degree of support
 MPC vote
 Minority view has an opportunity to clarify their position and
their preferred outcome – minuted
 Interest rate decision announced at 12noon the following day
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14. Public accountability
 Minutes are published a fortnight later
 Highlight all the different views and votes
 Blanchflower was in favour of cuts before the financial
crisis hit…
 Committee has to explain its actions regularly to
parliamentary committees
 Especially the Treasury Committee
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15. Missed target
 In the event of the target being missed by more than 1
percentage point (either way), the Governor has to
write an open letter to the Chancellor
 To explain why inflation is where it is and what the Bank
plans to do about it
 The MPCs job is to maintain price levels without
creating undue instability within the eocnomy
 Remit letters
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16. ..and fiscal policy?
 to support monetary policy
 Required because of the convergence criteria from the
Maastricht Treaty, for fiscal policy for monetary union
 EU Stability and Growth Pact
 PSBR should not exceed 3% of GDP
 Total public debt should not exceed 60% of GDP
 Whilst not binding, the UK was comfortably meeting these
criteria by the mid 1990s
 Not especially pro-European, more consistent with the
passive fiscal policy of the ‘monetarists’
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17. New Labour Innovations
 Two fiscal rules:
 Share the burden of public spending fairly between
current and future tax payers
 No bias against investment spending if policy had to be
tightened
 Keep public finances on course to be sustainable
 THE GOLDEN RULE
 SUSTAINABLE INVESTMENT RULE
 Enshrined in the 1998 Finance Act
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18. 1998 Finance Act ‘Code of Fiscal Stability’
 Any government must spell out how it intends to run fiscal policy
and publish twice yearly forecasts illustrating how the setting of
policy at any given time is consistent with its approach
 Growth in importance of macro modelling
 Up to the government whether to set itself operating rules and to
decide if they’ve been kept
 No penalty if missed though
 GOLDEN RULE
 Government will only borrow to fund investment
 Tax revenues should equal or exceed current spending
 Future taxpayers should only be asked to repay debt from which
they are likely to benefit – fairness provision
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19. Golden rule continued…
 It limits current (not overall) spending
 Reducing incentive for policymakers to make cuts in
public investment when spending plans have to be cut
 Traditionally, government cuts have fallen on the
investment rather than current side
 Where genuine economies are more likely to be made
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20. Sustainable investment rule
 Public sector debt should be kept at stable and prudent
levels
 Public sector net debt must be below 40% of national
income (at the end of every fiscal year of the current
economic cycle)
 When a government borrows to fund an investment
project, it effectively taxes in the future to fund borrowing
costs
 Sets a ceiling on funding today’s investments by
tomorrow’s taxpayers
 More fair?
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21. In summary
 Has it worked?
 Well, Chancellors 1993 until 2007 were very capable of
prudent economic management
 Exceptional global economic stability over this period
 Remit letter stating action was not required until 2007
 Is inflation the key to stable macroeconomic policy?
 A role for expectations?
 And in the cold light of the financial crisis?
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22. And since the coalition?
 Last month, the Chancellor, George Osborne, changed
the remit of the MPC
 Offers them a little more flexibility in targets
 So far, no noticeable change in the MPC’s behaviour..
 Despite some dissent, they have chosen to keep things the
same this month
 A (significant) minority wanted to introduce a further QE
round
 They forecast inflation as being around 3% mid-year and
highlight threats from the Euro Zone crisis and the
government’s fiscal squeeze
 Yesterday’s unemployment figures for the UK showed a rise
from 7.8 to 7.9%
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23. Tomorrow…
 Focus on the supply-side a bit and explore what has
been happening to productivity since the 1990s
 US productivity miracle
 The current productivity paradox
 Next week:
 macro policy since 2007: the financial crisis
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24. References
Wealth of information on the Bank of England website:
The Monetary Policy Committee: 10 years on
 They have good working papers too, although quite
technical
Barrell, R. and M. Weale (2003) ‘Designing and choosing
macroeconomic frameworks: The position of the UK
after four years of the Euro’, Oxford Review of
Economic Policy, 19 (1), 132-148.
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