It is expected that you have heard about the economic condition across the world. Countless people are speculating how a formerly thriving UK economy has slumped so abruptly, resulting in a lot of companies and people becoming bankrupt.
The stock market has become more unpredictable than it was in the past. The once flourishing real estate market has shown a steep decline. People are desperately looking for ways to get out of debt. The present economic dilemma plaguing the United Kingdom and the other first world countries is a result of the global economic depression.
The International Monetary Fund (IMF) predicted a fall in global income particularly this year and also a drop in global trade. Interest rates have been reduced to 0.5%, which is the minimum in the history of the United Kingdom for 315 years.
The shortfall of the UK government surpassed 10% of the Gross Domestic Product (GDP) in 2008 and might be even more in the next few years. Job losses struck 2.1 million people and analysts are cautioning that it would simply cross the barrier of 3 million by the end of 2009.
Inflation dropped steeply from 5.2% to 2.9% in the month of September 2008. Banks are still unwilling to offer money, which sustains the credit dilemma. With the present economic disaster, a basic Keynesian model i.e. the Fiscal (hike in government expenses and reduction in taxes) and Monetary Policy (reduction in interest rates to raise the supply of money in the economy) should be utilized to increase demand and thus support the economy.
However, the fact is we are not surviving in a one-period world and government deficit hikes made at present encourage public sector debt later on. The United Kingdom is presently applying a blend of the two models. However, this does not appear to be politically viable and reliable in the present financial market.
So what should the current government do? Many experts are of the opinion that the government should not do anything and instead wait for the economy to improve. Economic cycles are usual and this might be one of the causes behind this view.
They also feel that there is no emergency requirement for a dynamic fiscal policy. There is need for reconsideration as to how to save the financial/banking sector so that it minimizes public fund usage. Concentration should be on establishing more trustworthy banking institutions.
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