Download Chapter 12 Domestic Economy

Chapter 12 Domestic Economy
November 2007
Xiao Huiyun
A1 Introduction
 Britain’s
‘mixed economy’ – is an economy that is made
up of privately owned and state owned enterprises. Most
businesses in Britain are privately run and it is left to the
state to control major services such as health.
 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 cont
changing 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
 Highly
developed & efficient main road and rail network
and airports-- excellent infrastructure pp 203-204
 Natural resources
 Principal resources at present -- oil and gas in the
North Sea, on the coast of Scotland
 Large amount of coal, but has been kept for future use
 Manufacturing still playing important role
 Services, industries such as chemicals, electronics, etc
all doing well, important parts of British economy
A 3 Finance


There were 296 branches and
subsidiaries of foreign banks in
London in March 2002, more than
in any other centre worldwide. A
third of these banks are from the
euro area. Foreign banks manage
over one half of UK banking
sector assets, totaling over
£3,500bn, mainly on behalf of
foreign customers.
The UK banking sector originates
more cross border bank lending
than any other country - 19% of
the world total in March 2002.

BANKING
A 3 Finance



Insurance:
The UK insurance industry is the
largest in Europe and third largest
in the world with net premium
income of £157bn in 2001.
London is the world's largest
international insurance market,
with gross premium income of
£20.0bn in 2001. It is the main skill
centre for world reinsurance
business.
The UK is the global market
leader in aviation and marine
insurance, with a combined
market share of 23%.
A 3 Finance

FOREIGN EXCHANGE
 The
London foreign
exchange 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 Finance

London is the world's largest fund
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 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 Finance
 Statistics
show that banking, insurance, foreign
exchange, fund management, securities dealing are the
key aspects of the City’s international position.
 Since the euro was launched in 1999, London has
consolidated its position as the premier financial centre
in Europe and has become the leading centre for euro
trading.
 London is a leading centre for international financial
market beyond doubt.
A 3 Finance
The financial institutions
Banks
Building society
Insurance companies
Stock exchange
The 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 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.
A 4 The “Mixed Economy “
Private
Enterprise -- enterprises
other than those nationalised/public
ones.
Different forms of business
organisation – Single Proprietorships,
Partnerships, Co-operatives, Jointstock companies pp 205 – 206
A 4 the Mixed Economy cont
 Some
possible or potential advantages and disadvantages of
the various types of company organisation include:
 The single proprietorship
 Such 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.
A 4 the Mixed Economy cont
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.
A 4 the Mixed Economy cont
 Co-operatives
 Such
businesses operate mainly in the retail trade.
The 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
much 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 )
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
Nationalization
the
acquisition of private companies by the public
sector
Privatization
the
return of state enterprises to private ownership
and control
Different attitudes
Why nationalise?
. The post-war Labour government was elected on a
socialist manifesto, which promised more political
control over the major public utilities so their
development could be guided in the public interest
rather than simply for private profit.
 In 1945, as part of Britain’s policy to achieve full
employment, the Labour Government began to
nationalize key industries such as coal, steel, and
transport.
Different attitudes
Why privatise?
the nationalized industries are economically
inefficient, when compared to companies
operated under private commercial influences.
In state-owned industries the politicians, as
"proxy owners", are in charge and so their
priorities take precedence over commercial
ones.

Different attitudes
The second reason why state-owned
industries perform poorly is the plain if
unpalatable fact that a nationalized industry
does not have to succeed to survive.
Nationalized industries are dependent on the
government for their survival, not the market.
What is missing is the spur that drives private
industry to respond to consumer demands.

Different attitudes
 The
third reason why nationalized industries perform
poorly is that the basic philosophy of state
ownership denies and therefore fails to harness
positively the power of self-interest.
 Before
the practice of privatization, the nationalized
industries incurred losses on a grand scale - losses
which had to be financed by raising taxes, - as high
as 83% top rate on earned income, and 93% on
savings income.
Different attitudes
Generally speaking, the
nationalized
industries were inefficient and were a heavy
financial burden on the Exchequer.
As a result, the economic attitudes have been
changed towards privatization since early
1980’s.
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).
Potential or possible advantages of
privatisation



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
Potential or possible disadvantages
of 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
 Taxation
& Government Expenditure
 Despite the different attitudes towards nationalisation,
government 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.
Taxation & Government Expenditure
Where does the
government get its money
from?
Stock exchange
Taxation -- Direct and Indirect Taxes
Direct taxes – national insurance contributions,
income tax (a ‘progressive taxation system),
corporation tax (paid by companies)
Taxation & Government Expenditure
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.
Taxation & Government Expenditure
Government spending
Some of the main
areas of expenditure for 1999-2000 were:
social security
health
education
defence
£102 billion (29% of total)
£61 billion (17%)
£41billion (12%)
£21 billion (6%)
GDP Growth
 GDP Growth
 Average
Earning
A 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 Consumer
Look at the table “Student’s expenditure” on page 210
 British students have very specific spending patterns.
According 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 Revolution
Consumer
Protection guaranteed by the
Consumer Protection Act
The Credit Card Revolution leading more to Debt
Problem