Chapter 12 Domestic Economy

Focal questionsFocal 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) Why do you think there have been different attitudes tow

ards 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 IntroductionA1 Introduction‘mixed economy’ Privately owned (most) and state owned (m

ajor services such as health) enterprisesGovernment involvement: social welfare po

licies; laws to regulate industrial relationsNationalisation & privatisation

A 4 The Mixed Economy cont

A 4 The Mixed Economy cont

Nationalizationthe acquisition of private companies by the publi

c sector

Privatizationthe return of state enterprises to private ownershi

p and control

Nationalisation & privatisation (P206)

Nationalisation & privatisation (P206)

Why nationalise? The public interestNot profit-orientedGovernment-appointed directors & govern

ment involvement in long-term policyAutonomous 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 Nationalisation & privatisation Why privatise? EfficiencyProfit-orientedDecreasing government involvementThe free market: consumers, goods, servic

es, prices, manufacturers, providers of services

Inefficiency of nationalised industries

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

Inefficiency of nationalised industries

Failure to harness self-interestIncurment of losses on a grand scale—ta

x raise: 83% top rate on earned income, 93%, savings income

Privatisation—advantages Privatisation—advantages

Efficiency: lower prices, better servicesParticipation of ordinary peopleAccess to private capital marketsLess government intervention, less political pr

essureMore sources of capitalCompetition: incentive for better performance

of state-owned industries

Privatisation—disadvantages

Privatisation—disadvantages

Good management of nationalised industries: no need of privatisation (theoretically?)

Labor relations: interest of workersCo-ownership: worker-shareholders—ho

w much do they weigh?

Economic sectorsEconomic sectorsThe Service industries (health care, hospitality, real estate

and food chains)Financial services (banking and insurance): big revenue ear

ner; 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)

A 2 Natural Resources & Infrastructures (P204)

Highly developed & efficient main road and rail network and airports-- excellent infrastructure pp 203-204

Natural resourcesPrincipal resources at present -- oil and gas in the Nort

h Sea, on the coast of ScotlandLarge amount of coal, but has been kept for future useManufacturing: still importantServices, industries such as chemicals, electronics, etc: i

mportant & successful

A 3 FinanceA 3 FinanceThe financial institutionsBanksBuilding societyInsurance companiesStock exchange

The Bank of EnglandThe Bank of EnglandNationalised; operated on behalf of the governmentControls the currency; sets interest rate; acts as ban

ker both to the government and to the commercial banks

Monetary policy and financial policyIntegrity and value of the currency, stability of the fin

ancial system; the effectiveness of the financial services sector

A 3 FinanceA 3 Finance

London: March 2002296 branches and subsidiari

es of foreign banks 1/3: from the Euro areaForeign 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 FinanceA 3 Finance

Largest in EuropeThird largest in the worldNet premium income of £157b

nMain skill centre for world ins

urance businessGlobal market leader in aviati

on and marine insurance; combined market share: 23%

Insurance: 2001

A 3 FinanceA 3 Finance

FOREIGN EXCHANGE April 2001 Largest in the world Daily turnover: of $504b

n, 31% of global turnover＞ New York + Tokyo

A 3 FinanceA 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 FinanceA 3 FinanceSECURITIES 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

Regional Household Income Comparison 2006

Beneficial ownership of UK shares: end 2006Beneficial ownership of UK shares: end 2006

Private EnterprisePrivate EnterpriseThe single proprietorshipEasy to set upOwner: full controllimited amount of capital -- small businesses All the legal and financial responsibilities

Private EnterprisePrivate EnterprisePartnershipsLarger amount of capital; biggerEach partner: legally liable for all the debts of

the firm, even if incurred by the activity of another partner

Private EnterprisePrivate Enterprise

Co-operativesMainly in the retail tradeTheir customers who pay a minimum deposit

on a share in the businessVulnerable in the face of the intense competit

ion

Private EnterprisePrivate EnterpriseJoint stock companiesLarge amounts of capital Transfer of ownership: easy (shareholders selling sh

ares 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 LiabilityLimited LiabilityLimited LiabilityAn 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

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

Taxation & Government Expenditure

Where does the government get its money from? Stock exchangeTaxation -- Direct and Indirect TaxesDirect taxes – national insurance contributions, in

come tax (a ‘progressive taxation system), corporation tax (paid by companies)

http://www.statistics.gov.uk/CCI/nscl.asp?ID=7363

Taxation & Government Expenditure

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)

A 6 Consumer“Student’s expenditure”

(P 210)Around half of the expenditure: “essential items”Eg. accommodation, food, bills and household go

ods and course expenditureA larger contribution to tuition: course expenditur

e -- 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 EconomyOutlook for the UK EconomyTreacherous times aheadProfit warnings remain high.Companies stop short.Household goods, home construction, gener

al retailers, personal goods, etc affectedThe credit crunch

Real GDP quarterly growth Real GDP quarterly growth

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