Balancing Economic Growth and Inflation

This assignment delves into the complexities of balancing economic growth with inflation, specifically focusing on the UK. It examines the potential impact of interest rate adjustments and fiscal policies, such as public spending and tax incentives, on both economic growth and inflation. The goal is to develop a balanced policy that stimulates firm sector growth while mitigating risks to the value of money posed by household spending.

Macro Policy That Will Help Britain Recover
Currently, the UK economy is on the verge of slowed growth and an above the target
inflation. There is a need to proactively this crisis that comes with this needs to be addressed
proactively. This can be achieved by coming up with sound macro policies that can help to
address these issues. Reigniting economic growth will help the country deliver a better and more
fairer society while addressing inflation will help make borrowing less expensive and prices of
commodities to be normal (Blinder, 1987). Brexit, which is the immediate cause of sluggish
growth and increased inflation rate is of concern in coming up with a proper policy. It is also
important that any policies put forward do not hinder our nations growing engagement to
growing global competition and trade relations with other countries. This paper puts forward
some macro policy options, and advocates for sound monetary and fiscal policies.
The Growth of any country’s economy is measured using the Gross Domestic Product
(GDP). In simpler terms, the total produce of any economy help measure its growth. In this light,
this paper puts forward the following policies that can help UK to increase its productivity and
subsequently its economic growth (Vaitilin, 2011)
Innovation policy
Innovation is a key driver of any economy. Through innovation, new and better ways of
doing things (especially production processes) are discovered. It helps the economy to grow by
making a countries products to be competitive in the world market. While incentives on tax is
arguably one of the best ways to help a country increase its output, innovation can help a
country’s GDP to grow. When public money has been tightened, the budget should focus more
on bettering and putting up structures that will help improve innovation rather than on tax

incentives to corporations. Money should be spent directly on innovation rather than offering
incentives such as Research and Development tax credit.
Competition Policy
Competition in most cases is as companies strive to outdo each other innovation is
encouraged, the government can help increase competition among various industries by reducing
burdens associated with the administration, introducing flexibility into the labour market and
liberalizing key service sectors. This will help firms to take advantage of any potential of new
technologies. Firms that are technologically advanced offer more competition as compared to
those that do not.
Training and Technology
Training the labor force on significant skills has been shown to have a positive effect on
the productivity of any country. When the labour force of the UK has been well trained then it
will be in a better position to compete with labour from the European Union. Through Brexit,
movement of labour into Britain has become regulated and firms may find themselves at
crossroads on whether to hire foreign labour or local labour. Where local labour is well skilled,
then it will be hired. This will help create a fairer society and increase the countries productivity.
Investment in technology goes hand in hand with investment in innovation, with the
world becoming more globalized, information technology is playing a very big role and is
positively helping change labour productivity. Retraining of the workforce and advocating for
organizational change are important aspects of helping diffuse new technology. Technology will
bring about more competitive firms and help achieve the innovation policy objectives.
Finance for small and Medium Sized Enterprises

Small and medium sized enterprises play a key role in any nation’s productivity. They
provide employment to many households and are a source of income. Support for any starting
small and Medium sized Enterprises or those that already exist in monetary terms will help
improve the growth of small businesses (Hansen, 2003). Bureaucracies should also be removed.
They hinder the establishment of these enterprises. The government should strive to come up
with policies that improve the environment for the growth of small businesses. Such policies
may include, tax incentives, tax holidays and loans at low interest rates and favourable terms.
Growth of small businesses will see an increase in the country’s production while at the
same time increasing employment opportunities.
Housing Finance
Housing is not directly linked to growth of an economy but the large mortgage arrears
and re-possession of homes by banks can make loans to be strikingly expensive. As banks strive
not to be solvency due to a lot of non-performing loans in form of mortgages, they are likely to
increase the interest rates of loans to discourage borrowing. High interest loans are a recipe for
inflation. Government should consider the housing finance to be a key part of policy making to
foster growth and reduce inflation. Some of the monetary policies may include bailing out banks
which have large non-performing loans inform of mortgages and ensuring that interest rates are
controlled.
After controlling the economic growth, the governments need to control inflation to
ensure that it stays well within the targeted inflation rate. Inflation is brought about by the
growth of the economy through increased spending (Jonug, 1991). When consumers are willing
to spend more, the prices of commodities rises and theoretically, a countries currency is worth

less than it previously was. In layman’s language, the currency buys less that it could have
bought before. One adverse effect of inflation is the change in exchange rates. The exchange
weakens as compared to other currencies.
There a range of many methods that a government can use in order to control inflation.
However, the policies put forward should be such that they do not lead to a recession which will
in turn lead to slowed economic growth (Abel & Bernarke, 2005). One such example would be
when the government controls wage rates and controls the price of commodities. Such an action
would lead to many people losing their jobs and some companies close down.
The UK government can control inflation through the following way;
Contraction monetary policy
The goal of such a policy would be to reduce the amount of money that is in circulation
in the economy. This can be achieved by reducing the prices of bonds and increasing interest
rates (Feldstein, 1981). Such actions help reduce spending since those people who have excess
money would prefer saving it instead of spending. They will most probably use the money on
bonds and saving in banks where they can increase in terms of interest paid on money saved.
However, due to the slow economic growth, increasing interest rates can halt the
economic growth more and the government should prioritize more on reducing bond prices.
Increased interest rates for example, will mean less credit for small businesses and this will affect
their ability to access money for expansion purposes. Interest rates introduced should therefore
be reasonable. The government can also work with commercial banks to help small and medium
sized enterprises to access loans and credit at lower rates than the prevailing market prices. This
will help reduce spending by individuals since they access credit at high interest rates while at

the same time availing money to small businesses at lower rates. This brings about a two tailed
effect.
The idea in this paper is the government to introduce a balanced policy. A balanced
policy would balance public sending and changing tax rates (Heyne, 2002). If the UK
government for example, chooses to stimulate the its slow economic growth by availing more
funds to small businesses, increasing public spending and offering tax incentives then it would
have done no good to the inflation rate which is already above the targeted inflation. This is
because increasing in the amount of money in the economy by a fiscal policy as proposed by
John Maynard Keynes, consumer demand will increase and result to decrease in the value of
money (Inflation) (Stein, 1982).
The largest obstacle would be determining how the government gets involved in the
economy and the extent of such an involvement. The policy introduced should be to tailed,
accelerate economic growth, while at the same time curb inflation. To achieve this, the
government should prioritize on the firm sector of the economy. The policy should be modelled
in such a way that, the spending by the household sector is checked in order to reduce risks of
inflation while at the same time improving the environment for the firm sector so as to help it
grow. The household sector can be controlled by making sure that excess money is saved instead
of being spent by increasing the interest on bonds to lure them into buying government bonds
with the excess money, increasing income tax and privatization of various public parastatals. The
firm sector of the economy can controlled by reducing corporate tax, the government working
with commercial banks with an aim of availing loans to small and medium sized enterprises at
lower interest rates, and reducing bureaucracies involved in starting up firms and businesses.
Any surplus of produce in the economy due to innovation and improved technology should be

catered for by enabling exports. Since UK is no longer a member of the European Union this can
be achieved by entering into bilateral trade agreements with various countries.
References
Abel, A., & Bernarke, B. (2005). Macroeconomics. Pearson Addison Wesley.
Blinder, A. S. (1987). Hard Heads, Soft Hearts: Tough Minded Economics for a Just Society.
New York: Perseus Books.
Feldstein, M. (1981). The retreat From Keynesian economic. The Public Interest, 92-105.
Hansen, B. (2003). The Economic Theory of Fiscal Policy. Routledge.
Heyne, P. .. (2002). The economic way of thinking. Prentice Hall.
Jonug, L. (1991). Stockholm School of Economic Revisited. Cambridge University Press.
Stein, J. L. (1982). Monetarist Keynesian & New Classical economics. Oxford: Blackwell.
Vaitilin, R. (2011). Recovery Britain: Research Evidence to Underpin a Productive, Fair and
Sustainable Return to growth. Economic and Social Research Council.