Chapter 12 Domestic Economy
November 2004
Xiao Huiyun
A1 Introduction
 Britain’s
‘mixed economy’ – an economy in which there
is some public ownership as well as privately owned
business
 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
 Importance
of institutions of
City of London cannot be
over-emphasised
 known as the world’s
leading international
financial centre
 Over 550 international
banks and 170 global
securities houses have
offices in London
 BANKING
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
The financial institutions
Banks
Building society
Insurance companies
Stock exchange
A 4 The “Mixed Economy “
 Private
Enterprise -- enterprises other than those
nationalised/public ones.
 Different forms of business organisation – Single
Proprietorships, Partnerships, Co-operatives, Joint-stock
companies pp 205 – 206
 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
 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 )
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
A 4 The Mixed Economy cont
 Why
nationalise?
 The post-war Labour government was elected on a
socialist manifesto (see also Chapter 11 ‘Welfare’),
which promised more political control over the major
public utilities so that their development could be guided
in the public interest rather than simply for private profit
 Those industries which were nationalised had managing
directors appointed by the government and, whilst they
were left to run their own affairs on a day-to-day basis,
they were accountable to the government concerning
more long-term policy.
A 4 The Mixed Economy cont
 Reasons
for nationalization
 Natural
monopoly
 Externalities
 e.g.
subsidizing public transport (London Underground) may be a secondbest option to road pricing.
 Equity
 e.g.
or distributional consequences
protecting transport in rural areas
 Co-ordinating
 e.g.
a network
British Rail could have an overview of the whole rail system
A 4 the Mixed Economy
 Why
privatise?
 The main argument used by the ‘privatisers’ is that nationalised
industries are economically inefficient, when compared to
companies operated under private commercial influences. As
mentioned above, the Conservative governments of the 1980s
regarded decreasing state involvement in the economy as a key
component of their policies
 This would enable private companies to compete in a free-market
environment, where consumers of goods and services decide
what is useful or desirable. Prices should be determined by what
people are willing to pay, rather than based purely on cost.
A 4 The Mixed Economy cont
 Reasons
for privatization
 Improve incentives for production efficiency
 makes
managers accountable to shareholders.
 but sheltered monopolies will be sleepy no matter who owns
them
 so privatization will be most successful where there is
potential for competition.
 Pre-commitment
political reasons
by government not to interfere for
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
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.