Monetary policies will involve the use of interest rates and other monetary tools so that they can manage macro monetary parameters such as inflation, the amount of consumer spending, consumer confidence, exchange rate index, economic growth and unemployment within an economy. Recession is because popular downturn in economical activity and the government could react through expansionary monetary insurance policy which involves lowering lenders' reserve requirements, by decreasing rates of interest to increase money resource and boost economical growth. This coverage may be applied contractionary, to control the rise popular by increasing the interest rates thus lowering the supply of real money in the economy. This takes on a great role in controlling inflation (Overall economy watch).
In the UK, monetary policy is being controlled by the bank of England which has independence in setting up interest levels. The goals of the UK federal government in the tough economy have gone to reduce inflation, reduce unemployment, impact consumer spending and build a strong economic expansion.
Although expansionary financial policies could help reduce the intensity of an economic recession, there is absolutely no guarantee achieve the required results because of the following limits.
It is difficult to regulate many economic factors with just one tool - interest rate
Low interest rates may neglect to encourage consumer spending if there is little confidence throughout the market. They might neglect to increase their spending if their jobs are at risk because of the downturn in the economy - Liquidity trap. Lenders are unwilling to increase their loaning during a recession, and businesses may well not have the ability to spend money on new facilities for extended operations because of the confidence level in the economy.
Time shape: the effect of insurance plan decisions, a reduction in interest could take as long as a year or even more to be felt and have a tremendous impact on a recession.
Interest rates could have more effect on some industries of the overall economy than on other areas. A decrease in interest levels reduces the rates on mortgage payment, in that way increasing their disposable income but minimizing the disposable income of men and women with cost savings.
A change in interest rate impacts the exchange rate index.
Fiscal policies are the use of changing taxation and authorities spending in an effort to influence the level of planned expenditure in an overall economy (aggregate demand) and therefore, the level of monetary activity.
Fiscal insurance plan can be applied in various ways. In a very recession, the federal government can increase their spending and decrease taxes thus increasing the throw-away income of consumers which in turn boosts the level of economic activity (Expansionary fiscal policy). Alternatively, if there is inflation, the federal government can increase taxes and trim spending to decrease the market down a bit (Deflationary fiscal insurance plan). Principally, the execution of fiscal plan tends to stabilise economic expansion and activity, keeping away the increase and slump economic cycle.
Time Body: Effective management of the macroeconomic variables is difficult as fiscal coverage is effectively made once a year during the gross annual budget while economic insurance policy decisions are considered monthly and each coverage instrument could put a pressure on the other one. The effect of the insurance plan could have a long while to filtering through the overall economy.
Since fiscal coverage is implemented once a year during the gross annual budget, it will suffer from poor forecast information. For instance, if a tough economy has been forecasted, the federal government would subsequently increase spending and cut fees to increase aggregate demand, however, if the forecast proceeded to go wrong, it might cause inflation in the economy.
Effects of reduced federal spending: Reduced spending could negatively affect general population services such as education, defence, health, carry causing cultural inefficiency.
Cutting down of fees might not in reality increase consumer spending if there is a low self-confidence level throughout the market.
Budget Deficit: In a very recession, increased authorities spending may lead to a budget deficit which would warrant increased fees in the future and may cause a brain drain or crowding out in the economy.
Impact of federal government borrowing: Increased government spending to increase aggregate demand ends up with advertising bonds and borrowing, throughout a recession, this leads to a loss of the private sector investment.
Increased spending leading to higher interest levels could put pressure on interest levels thus creating a slowdown in economical activity.
The UK authorities in the 60's and 70's put in place the use of fiscal insurance policy to stabilise economical activity. However, in the overdue 70's experienced an increase in unemployment and inflation as proof the inadequacy of fiscal insurance plan in maintaining financial stability. Current UK demand coverage concentrates more on the utilization of monetary insurance plan due to its advantages over fiscal plan. Changes in rates of interest can be effected easily than changes in administration spending and fees. Fiscal plan has more effects on federal borrowing and work incentives thereby affecting the economy all together.
The engineering industry is greatly reliant on money from the finance sector to power the demand for properties and cash flow requirement of engineering assignments. Monetary and fiscal regulations are applied to the economy to accomplish their macroeconomic objectives and a change in these regulations would have a direct effect on the construction industry (Geoff Briscoe, 2009).
An increase in interest rate will raise the costs of credit lending options having implications on the actions of the structure industry as well as the clients.
The rate of taxes regulate how much disposable income consumers are willing to spend on all services including building related activities which include housing.
Source: H. M. Treasury
(Available: www. economicshelp. org/macroeconomics/fiscal-policy/uk-fiscal-policy. html)