Jun
23
2011
The United Kingdom has been an enthusiastic supporter of the Lisbon Strategy since it was agree on by the Council of Ministers in 2000. The initial goal of the strategy was to make Europe the most competitive knowledge based economy by the year 2010. This economy was to be able to promote sustainable growth, greater social cohesion and a focus on the environment. The broad goals of the strategy were revised in the year 2005, when it was decided to redirect the focus of the program to growth and job creation. This paper will seek to describe the aspects of the Lisbon Programme as it applies to the United Kingdom.
The UK has a three-pronged strategy for adhering to the Lisbon Strategy: promoting macroeconomic stability, promoting productivity growth and increasing employment. In relation to macroeconomic stability, the government of the UK will seek to meet the inflation targets set by the Bank of England’s Monetary Policy Committee. As part of the programme, the government will seek to borrow only to finance investment and not consumption. In addition, net debt will be maintained below 40 per cent of GDP over the economic cycle. As a result of these stringent fiscal policies, the UK’s economy was the only G7 nation to not experience a recession during the economic downturn caused by higher oil prices in 2001. In addition there has been an effort to make the public sector in the UK more efficient, with the launch of the Comprehensive Spending Review (CSR), which was launched in 1997 and reviewed in 2000, 2002 and 2004. In addition, it will attempt to create 20 billion pounds of efficiency gains in the public sector which will then be recycled into front-line services. Below is a graph that represents the efficiency targets that the UK aims to hit in the year 2010.
One of the biggest challenges to the UK programme that was set in 2005 is maintaining fiscal responsibility will be its aging population. With forty percent of the United Kingdom’s population set to hit retirement age in 2030, there will be a lot of strain on the pension system. In order to counteract this, the UK government will work to encourage both private and public savings by workers now. Also, the Finance Act 2004, which sets up the set of rules governing taxation on pensions, was passed and will come into in April 2006. This is to ensure the workers have clarity about where their money is going. Another aspect of their plans for dealing with the raging population is to encourage people to work longer. While this may seem like a plausible idea, it is also sure to be unpopular with the public.
The second aspect of the UK reform programme focuses on a broad goal: to increase productivity. The economy of the United Kingdom, has until recently lagged behind other G7 countries when it comes to labour productivity. In order to counter this, the government is working to increase incentive to invest in research and development, improving access to credit, encouraging the growth of small and medium sized businesses. The sector of the government that is most responsible for promoting competition is the Office of Fair Trading (OFT). This office works to make sure that consumers are not negatively affected by unfair agreements between companies. Also, this agency works to find how public sector spending affects the economy. In order to promote more enterprise, the OFT has been working to improve access to credit with greater regulation of lenders.
A cause for concern has been an overall lack of investment in the economy. The solution for this according to the UK government is to increase investment, especially in the housing sector. While this will be a way of keeping the housing market stable, it might have the undesired effect ‘crowding out’ private investment in that sector. Although a lot is made about the fact that the UK does not have the rates of investment comparable to other wealthy countries, there does not seem to much in the programs to increase investment.
Another major aspect of the Lisbon reforms in relation to promoting productivity growth are in relation to Research and Development. While the amount of research that happens in the UK is second only to the United States, translating advancement made into the lab into increased productivity has proved to be tougher to the UK. One of the ways that the UK government is working against this is to strengthen the scope of copyright laws, while making the process of getting a copyright simpler for businesses. In addition, there is an ambitious ten-year plan to enhance the educational system for those studying in fields related to science and technology. Other reforms that have been planned include giving tax credits for research and development and lowering the corporate tax on small scale enterprises from 23 to 19 percent. While it can be debated how much of an impact all these reforms will have, it is easy to see on the simplest graphs that increased productivity will have positive effects on the economy.
The immediate effects of increasing productivity can be seen in this graph. Output per factor of production would increase even as the inputs remained the same. This effect is shown on the overall supply and demand curves for the economy:
In this graph, the supply curve shifts out to ‘S*’ with improvements in technology. It is easy to see that society is better off producing at ‘Q*’ at price ‘P*.’
It is easy to see that Lisbon strategy is having some impact on the way that policy-makers in the United Kingdom. With this three pronged strategy the government is working to promote sustainable long-term growth for the economy. Although the overall effect of some of these policies will be minimal, it is good to see that governments in the European Union are taking an interest in increasing the overall competitiveness of their economies.