Chapter 12 Domestic Economy

Focal questions  What are Britain ’ s principal natural resources? (P204)  Why is the City of London known as the world ’ s leading international financial centre?(P204, Slides14-21) London  Why do you think there have been different attitudes towards nationalisation and privatisation in Britain ’ s economy since the end of the Second World War? (PP206-7)  How do you understand the relationship between the British Government and Britain ’ s economy? (PP207-8)  How are consumers protected in the United Kingdom? (P210)

A1 Introduction  ‘ mixed economy ’  Privately owned (most) and state owned (major services such as health) enterprises  Government involvement: social welfare policies; laws to regulate industrial relations  Nationalisation & privatisation

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

Nationalisation & privatisation (P206)  Why nationalise?  The public interest  Not profit-oriented  Government-appointed directors & government involvement in long-term policy  Autonomous management of daily affairs

 By the end of the 1970s  Margaret Thatcher  Primary objective: to beat inflation  “ In politics if you want anything said, ask a man. If you want anything done, ask a woman ”

Nationalisation & privatisation  Why privatise?  Efficiency  Profit-oriented  Decreasing government involvement  The free market: consumers, goods, services, prices, manufacturers, providers of services

Inefficiency of nationalised industries  “ Proxy-owners ” in state-owned industries: politicians; affecting commercial decisions  Nationalized industries: no need to succeed; dependence on government, not market: no incentive

Inefficiency of nationalised industries  Failure to harness self-interest  Incurment of losses on a grand scale — tax raise: 83% top rate on earned income, 93%, savings income

Privatisation — advantages  Efficiency: lower prices, better services  Participation of ordinary people  Access to private capital markets  Less government intervention, less political pressure  More sources of capital  Competition: incentive for better performance of state-owned industries

Privatisation — disadvantages  Good management of nationalised industries: no need of privatisation (theoretically?)  Labor relations: interest of workers  Co-ownership: worker-shareholders — how much do they weigh?

Economic sectors  The Service industries (health care, hospitality, real estate and food chains)  Financial services (banking and insurance): big revenue earner; London: overseas branches of financial organizations  Industries: a steady decline since the 1960s; 20%  Agriculture: 60% of the total food demands of the nation  The Oil, coal and natural gas reserves: considerably high; 10% of the national GDP

A 2 Natural Resources & Infrastructures (P204)  Highly developed & efficient main road and rail network and airports-- excellent infrastructure pp  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 important  Services, industries such as chemicals, electronics, etc: important & successful

A 3 Finance  The financial institutions  Banks  Building society  Insurance companies  Stock exchange

The Bank of EnglandBank The Bank of EnglandBank  Nationalised; operated on behalf of the government  Controls the currency; sets interest rate; acts as banker both to the government and to the commercial banks  Monetary policy and financial policy  Integrity and value of the currency, stability of the financial system; the effectiveness of the financial services sector

A 3 Finance  London: March 2002  296 branches and subsidiaries of foreign banks  1/3: from the Euro area  Foreign banks: 50%+ of UK banking sector assets, £ 3,500+bn  The UK banking sector: cross border bank lending - 19% of the world total  BANKING

A 3 Finance  Largest in Europe  Third largest in the world  Net premium income of £ 157bn  Main skill centre for world insurance business  Global market leader in aviation and marine insurance; combined market share: 23%  Insurance: 2001

A 3 Finance  FOREIGN EXCHANGE  April 2001  Largest in the world  Daily turnover: of $504bn, 31% of global turnover  ＞ New York + Tokyo

A 3 Finance  UK: World's largest fund management centre  $2,460bn of institutional equity holdings in 1999  Assets managed on behalf of domestic and overseas clients ： £ 2,800+bn in 2000  London: leader in the management of overseas clients non-domestic portfolios  FUND MANAGEMRNT

A 3 Finance  SECURITIES DEALING  Number of foreign companies listed on the London Stock Exchange: second (No.1: NY)  In the first eight months of 2002, turnover in these companies booked in London: 56% of all trading in foreign companies around the world  Turnover in Euro-area stocks: 2/3 of all foreign equity trades booked in London  London: major centre for the international bond market

Regional Household Income Comparison 2006

Beneficial ownership of UK shares: end 2006

Private Enterprise  The single proprietorship  Easy to set up  Owner: full control  limited amount of capital -- small businesses  All the legal and financial responsibilities

Private Enterprise  Partnerships  Larger amount of capital; bigger  Each partner: legally liable for all the debts of the firm, even if incurred by the activity of another partner Such businesses can raise larger

Private Enterprise  Co-operatives  Mainly in the retail trade  Their customers who pay a minimum deposit on a share in the business  Vulnerable in the face of the intense competition Such businesses operate mainly

Private Enterprise  Joint stock companies  Large amounts of capital  Transfer of ownership: easy (shareholders selling shares to anyone else)  Risk: 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  Limited Liability  An investor ’ s liability to debt is limited to the extent of their shareholding  100 £ 1 shares: bankruptcy — greatest loss, £ 100

A 5 The Role of the Government  Growing government influence (P207)  The two World Wars: the proportion of income from economic activity devoted to government expenditure -- sudden increases  Dropping after each war: 46% in 1981 & 1982, 38% in 1983, a slight rise in the early 1990s (economic downturn), 39% in 1998  To reduce the share of public expenditure of GDP

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: (P208)  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.

A 6 Consumer “ Student ’ s expenditure ” (P 210)  Around half of the expenditure: “ essential items ”  Eg. accommodation, food, bills and household goods and course expenditure  A larger contribution to tuition: course expenditure -- a higher percentage (the government)  Students who lived at home with their parents vs students living independently: a quarter of the amount on housing

Outlook for the UK Economy  Treacherous times ahead  Profit warnings remain high.  Companies stop short.  Household goods, home construction, general retailers, personal goods, etc affected  The credit crunch

Real GDP quarterly growth

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