Title: Austerity Measures On The UK Economy, Will This Lead To Double Dip Recession – Research Proposal Example

PHD Proposal Austerity measures on the UK economy, will this lead to double dip recession? Introduction The Management Issue/Problem The Research Will Address
The national economy of UK is reeling in a budget deficit of 11.1% of its GDP(HM Treasury,2010).It has a spiralling national debt whose figures show that in1997 it was £357million, in 2007 it was £527million and in 2010 it is a staggering £957 million (HM Treasury,2010). The most critical issue however, is to bring the deficit within the range of 3% by the end of 2014/2015. Thus UK government is now seems to be focused on the reduction of its expenditure to curtail the deficit. The main aim of this research therefore is to assess as to whether the steps taken by UK Government will result into the reduction of the deficit or not.(Barell, et. al, 2009).
Project Background: Financial crisis 0f 2007-2010(The Great Recession)
Despite a set back after the September 11, 2001 terrorist attack in US, the world enjoyed an economic growth. In Britain house prices were rising , unemployment was falling and the economy was growing at a pace in excess of 3%. The Guardian reported that , “The years leading up to August 2007 had seen the development of new and sophisticated ways for the financial markets to make –and as has subsequently been revealed , lose money. Consumers in the US and Britain were living beyond their means, borrowing money to buy houses and fund their spending habits. Asset prices-particularly the cost of homes-rose rapidly, presenting an insurmountable for first-time buyers. Lenders solved this difficulty by relaxing the criteria for granting loans. They then bundled up poor-quality loans, mixed them up with some good quality mortgages and sold the packages of debt in a process known as securitization. By the summer of 2007, the money raised through securitization was funding more than half of Britain’s home loans”.(guardian.com, 2008).
As there was a lot of money awash for consumers all economic sectors enjoyed business growth and there was consistent growth on the macroeconomic scale of 3 % of GDP.
However the world economic situation turned bad on August 9 2007 (with all the resonance of August 4 1914) . It marked the cut-off point between “an Edwardian summer” of prosperity, tranquillity and the trench warfare of the credit crunch- the failed banks, the petrified markets, the property markets blown to pieces by a shortage of credit. Since then the world economy went on a free fall and markets started to crumble.
The Guardian also reported, “The big problem for policymakers, not just in Britain but around the world, is that they are fighting war on two fronts. Central banks and finance ministers are grappling not just with the credit crunch but also with rising inflation”. On August 9 2007 , crude oil was trading at just over $70 a barrel; by August 2008 it had peaked at $145 a barrel. This affected the airline industry which than indirectly affect the hospitality industry. Rising food prices also pushed the cost of living , making it harder for central banks to justify cuts in interest rates traditionally the first line of defence in a credit crunch. Companies went into administration hence many people were left unemployed. Unemployment as measured by the wider International Labour Organisation (ILO) climbed to 1.92 million and then went to 2.4million (http://www.incomesdata.co.uk). The rate of unemployment indicated by ILO was also the significant part of the total work force.
Policy Responses-Keynesian resurgence
The financial phase of the crisis led to emergency interventions in many countries. As the crisis developed into genuine recession in major economies, economic stimulus meant to revive economic growth became the most common policy tool. After having implemented rescue plans for the banking system, major developed and emerging countries announced plans to relieve their economies. In particular, economic stimulus plans were announced in China, the United States and the European Union. In the final quarter of 2008 , the financial crisis saw the G-20 group of major economies assume a new significance as a focus of the economies and financial crisis management.
The European Commission proposed a €200 billion stimulus plan to be implemented at the European level by member countries in September. The European Central bank injected $99.8 billion in overnight money market auction. The Bank of England pumped in $36 billion. Altogether, central banks throughout the world added more than $200 billion since September 2007.
On 8 October 2008 the British Government announced a bank rescue package of around £500billion. The plan comprised of three parts. First, £200 billion was to be made available to the banks in the Bank of England’s Special Liquidity scheme. Second, the Government was to increase the bank’s market capitalisation Fund, with an initial £25 billion and another £25 billion to be provided if needed. Third, the government would temporarily underwrite any eligible lending between British banks up to around £250 billion.
Question(s) the research will address (Objectives)
The main objectives of the research are guided by some of the macroeconomic variables described by Dillman (2000) variables in macroeconomics. They are:
1) The UK has a rising debt, is fiscal consolidation the best solution?
2) There is a rising budget deficit, coupled with relatively weak growth; will this inevitably translate into a growing debt?
3) Rising debt may harm growth prospects in UK; will this crowd out private investment which is the government’s main tool for growth.
4) Does higher borrowing by the government require interest rates and does this stifle private capital accumulation and potential output?
5) Rising debt will entail higher servicing costs, putting additional pressure on budget balances. How will this impact the macroeconomic growth which commensurately grows with interest rates?
6) Given the outlook of the UK economy, the interest burden will significantly exceed the GDP growth rate. Will this lead to RISK OF A DEBT TRAP and ultimately a default?
To come to grips with a ‘problem’ or ‘issue’, the researcher must try to comprehend its structure and its underlying causes (De Wit and Meyer, 2004). This is done through strategic diagnosis activities.
The literature review is going to follow the strategy process using the framework of Johnson and Scholes (1993) divided into following activities:
Literature Review
a) Analysing
i) External assessment of environment- exploration of the UKs environment using the Fahey and Narayanan (1986), STEP framework (Sociological, Technological, Economic and Political factors).
ii) Internal assessment- activity of investigating the capabilities and functioning of the government. This is going to use the strategic capability of the Conservative dominated government i.e. analysing their intend strategy through 2010 Manifesto, 2010 Emergency Budget, activities of the newly formed Office for Budget Responsibility (OBR). This will also analyse their emergent strategy which will shape the research strategy of this project into dominantly exploratory (Sanders, Lewis and Thornhill, 2007).
b-Choosing
i) Identifying options- This is the weighing of deliberate and emergent elements of strategy formulation which will lead the government to realise intended objectives. Identifying options leads to the formulation of hypothesis theories such as
UK can arrest rising debt by implementing fiscal consolidation (austerity measures).
Rising budget deficit coupled with relatively weak growth will translate into growing debt.
Rising debt may harm growth prospects in the UK by crowding out private investment.
Higher borrowing by the government will require higher interest rates, which stifle private capital accumulation and potential output.
Rising debt will entail higher servicing costs, putting additional pressure on budget balances.
Given the outlook of UK economy, the interest burden will significantly exceed the GDP growth rate, increasing the risk of Debt Trap.
Fiscal stimulus will not be sufficient to prevent government debt ratios from rising.
Extending citizens’ working lives by several years will ease budgetary pressure.
Radical and rapid structural adjustment in budget revenue and expenditure is required to be implemented from 2010 to achieve the 3% deficit ceiling of the EU Stability and Growth Pact by 2014/2015 financial year.
Rapid structural adjustment by high budget cuts may lead to double dip recession.
ii) Evaluating options- this is where the above mentioned options will be analysed to see if they are feasible and reasonable. This involves Johnson and Scholes (2003) generic testing of suitability, feasibility and acceptability.
iii)Selecting a strategy- after the evaluation of the options , the most suitable, feasible and also ethically acceptable strategy will be selected.
3 Implementing
Implementing a strategy explores the key government’s variables structure, culture and systems which will be very crucial and critical to the coalition government. A clash of ideologies between The Conservatives and Liberal Democrats will be highly tested at the stage of implementation.
b) Economic Indicators
An economic indicator is a statistic about the economy (Moffatt) . This project will largely follow economic indicators which allow analysis of economic performance and predictions of future performance and predictions to achieve its objectives of exposing the effects of austerity measures.
Different Economic indicators the project will use include various indexes, earnings reports and economic summaries. Examples include unemployment rate, housing starts, Consumer Price Index (a measure for inflation), Consumer Leverage Ratio, industrial production, bankruptcies, GDP, retail sales, stock market prices and money supply changes.
c)Dynamic stochastic general equilibrium
Dynamic stochastic general equilibrium modelling (DSGE) attempts to explain aggregate economic phenomena, such as economic growth, business cycles, and the effects of monetary and fiscal policy, on the basis of macroeconomic models derived from microeconomic principles.
Structure of DSGE models
They are dynamic, studying how the economy evolves over time. This is what this research wants to achieve over a period of five year tenure of the coalition government. They are stochastic, taking into account the fact that the economy is affected by random shocks such as technological change, fluctuations, or errors in macroeconomic policy-making. The main aim of this project is to determine whether spending cuts policy by new UK government is not a big mistake which may lead into a double dip recession.
Advantages and Disadvantages
Schools of DSGE modelling
c) How will the Fiscal Policy Affect recovery?
d) How will the Monetary Policy Affect Recovery
One of the Bank of England’s two core purposes is monetary stability. Monetary stability means stable prices- low inflation- and confidence in the currency
e) Macroeconomic facts
Growth, Employment and Productivity
The dominant macroeconomic element in developed economies like UK is that of growth of output. In his budget speech Chancellor George Osborne outlined the “Government’s macroeconomic strategy to help provide a stable economic foundation for private sector growth”, (HM treasury-Budget 2010).
Table 1
2009
2010
2011
2012
2013
2014
2015
GDP
-4.9
1.2
2.3
2.8
2.9
2.7
2.7
CPI Inflation
2.1
2.7
2.4
1.9
2.0
2.0
2.0
Summary of OBR’s Budget central economic forecast: Source HM Treasury Budget 2010
An extrapolation of these figures forecasts that UK economy will grow. The question is how will there be growth when the government is implementing spending cuts which lead to higher unemployment and less circulation of money?
Growth accounting and growth theory seems to answer these questions (Dorbusch , Fisher and Startz,1998).
Growth accounting explains what part of growth in total output is due in growth in different factors of production (capital, labour, etc). Growth theory also help to understand how economic decisions control the accumulation of factors of production, for example , how the rate of saving today affects the stock of capital in the future.
Growth Accounting
Output grows through increase in inputs and through increase in productivity due to improved technology and a more efficient workforce. The intended strategy (Mintzberg et al, 1982) of the ConLib coalition government is to let the private sector take the lead in growth where productivity is relatively high and at the same time extending the working life of the population from 65 to 70 for men and 60 to 65 for women.
The production function provides a quantitative link between the inputs and outputs. As a simplification, we assume that labour (N) and capital (K) are the only important inputs. Equation (1) shows that output (Y) depends on inputs and level of technology (A). (We say that A represents the level of technology because the higher A is , the more output is produced for a given level of inputs. Sometimes A is just called “productivity”, a more neutral term than “technology”.)

Y= AF(K,N) (1)
More input means more output. In other words, the marginal product of labour or MPN (the increase in output generated by increased capital ) are both positive.
Equation (1) relates the level of output to the level of inputs and the level of technology. The production function in equation (1) can be transformed into a very specific prediction relating input growth to output growth. This prediction is summarised by the growth accounting equation:

∆Y/Y = [(1-
Output = (Labour share x Labour growth)+ (Capital share x Capital growth)+technical progress
Growth
This leads into the Cobb-Douglas Production Function:
Y= A
The growth rate of total factor productivity is the total amount by which output would increase as a result of improvements in methods of production, with all inputs unchanged. This is one of the determinants of GDP
Empirical Estimates of growth
Solow(1957) suggested a simple decomposition that under the assumptions of constant returns to scale and competitive markets, the rate of growth of output can be written as
,
where are the growth rates of output ,labour and capital respectively, and a is the share of labour in output; q then measures that part of growth that cannot , under the maintained assumptions, be explained by either growth of labour or growth of capital. The term has been dubbed the multifactor productivity growth, or the Solow residual.
Solow found that the important determinants of GDP growth are technical progress, increased labour supply , and capital accumulation –in that order. The important determinants of growth in GDP per capita are technical progress and capital accumulation.
Increased population actually decreases GDP per capita even though it increases GDP. Both conclusions follow directly from equation (2). More workers means more output, but output increases less than proportionately. Equation (2) tells us that each percentage point of growth in the labour force leads to a 1- percentage-point increase in output, specifically, about three-quarters of a point . Because increase is less than one for one, output grows less quickly than the number of workers and the output per worker (GDP) falls: If you increase the number of workers without proportionately increasing the number of machines , the average worker will be less productive because she has less equipment to work with.
Growth Theory: The Neoclassical Model
Neoclassical growth theory focuses on capital accumulation and its link to savings decisions. This is highly linked to the spending cuts of the coalition government which is reflected by the budget announced by The Chancellor in June 2010(HM Treasury , Budget , 2010).
This model codified as Solo-Swan Growth model, assumes that countries use their resources efficiently and that there are diminishing returns to capital and labour increases. This is what the UK coalition government is striving to achieve. From these two premises, the neoclassical model makes three important predictions. First increasing capital relative to labour creates economic growth, since people can be more productive given more capital. Second , poor countries with less capital per person will grow faster because each investment in capital will produce a higher return than rich countries with ample capital (though this point is not what the research wants to test).
Third , because of diminishing returns to capital, economy will reach appoint at which no new increase in capital will create economic growth. This “steady state” is what the research will try to put to test using the initiatives of the government.
This research will try to prove the hypothesis theory by this model which states that, “countries can overcome steady state and continue growing by inventing new technology”. This theory also states that, in the long run, output per capita depends on the rate of saving, but also considers that the rate of output growth should be equal for any saving rate. In this model, the process by which countries continue growing despite diminishing returns is “exogenous” and represents the creation of new technology that allows production with fewer resources. Data collected will be used to analyse the model’s prediction, which states that technology improves the steady state level of capital increases, and the country invests and grows.
The Stochastic Behaviour of Output and Unemployment
RESEARCH
The question which may lead to carry out a research is:
Austerity measures on the UK economy, will this lead to double dip recession?
Objectives
Objectives leading to research are:
After establishing the objectives then comes data gathering. Research paradigm is shaped around objectives (Guba and Lincoln, 1994)
Methodology
The Methodology to be used is the inductive theory based on collecting data and then developing a theory based upon data analysis. This method has been selected because it is not rigid as the deductive methodology. The economic environment is highly dynamic hence this methodology will suit the research project. As economic issues and problems may be presented in an unstructured way, research may also draw upon deductive approach to provide relevance and practical application to solve problems brought by austerity measures
Research Philosophy
Research approach
Induction: building theory
The researcher is going to collect data such as economic growth, unemployment, inflation, spending cuts, etc to get the feel of what is going on, so as to understand better the nature of the problem. The next task will be to make sense of the data collected by analyzing those data. The result of this analysis would be the formulation of theory which is an inductive approach.
Combining research approaches
To fully compliment the inductive approach, deductive approach is also used where readily proven issues (theories) are brought into picture to provide relevance and practical application of solving problems (Hakim, 2000).
Research Strategies appropriate for this project
This research is mainly going to be PHENOMENOLOGICAL , since it is going to look at the world as something that is socially constructed and subjective(Easterby-Smith et al ,2002). Researcher is also going to be part of what is going to be observed as a citizen of UK. This project is going to be based on qualitative data and is given meaning by the people based upon people’s experiences.
This research is going to focus on facts and also develop understanding as to what is actually happening. By focusing on the totality of each situation, the researcher will
develop ideas via induction. It is going to establish causal relationships
between variables which may be termed explanatory research. The situation
here is studying a situation or problem in order to explain the relationships
between variables.
Strategies going to be used in this project are: survey, action research, grounded
theory and dominantly archival research.
Data to Be Collected
Quantitative Data Collection Method
Researcher aims to collect a mix of internal information used to implement the government austerity measures i.e. HM Treasury Reports, Budget figures, GDP figures from OBR statistics, Directgov, Guide to Official Statistics and external information for unemployment figures, sociological factors from other bodies such as Europa, RBA Information Services, Biz/ed, SOSIG and Bank of England .The type of data I will collect is in numerical form e.g. unemployment figures, deficit figures, economic growth before austerity measures, during the implementation period to use for comparison and argument purpose. To save time secondary data are used which may be raw data, where there has been little if any processing, or compiled data that have received some form of selection or summarising (Kervin,1999).
Types of secondary data
i) Documentary secondary data- which include written material such as organisation’s websites e.g. HM Treasury, reports, journals, newspapers and interview transcripts.
ii) Survey-based secondary data- which are data collected using a survey strategy, usually by questionnaires that have been analysed for their original purpose. These will be collected through three distinct subtypes which are
(a) Censuses- usually carried out by the government e.g. census of population, census of employment. Censuses are unique unlike surveys, because participation is obligatory (Hakim, 2000).
(b)Continuous and regular surveys- are those surveys that are repeated over time (Hakim, 1982). They include surveys where data are collected throughout the year such as family spending, labour market trends, economic and social data figures (Walker, 2002).
iii) Multiple-source secondary data-based on documentary or on survey secondary data, or can be an amalgam of the two. Multiple-source data which will be used are : (a) area based e.g. government publications , newspaper country reports, books and journals (b) time based e.g. government’s statistics and reports, publications, EU publications, books and journals.
Advantages of secondary data
a) May have fewer resource requirements
Since this research is on a national scale basis , the researcher may not cover every corner of the country carrying out surveys on unemployment, growth, household spending. For many research questions and objectives the main advantage of using secondary data is the enormous saving in resources such as time and money (Ghauri and Gronhaug, 2005). Consequently the researcher may be able to spend more time analysing and interpreting far larger data sets such as those collected by government surveys.
b) Unobtrusive
This is a quick way of collecting data of high quality than researcher’s own obtained data (Steward and Kamins, 1993). That suits this project which is highly dynamic as it involves events affecting the macroeconomy which swing from one end to the other.
c) Can provide comparative and contextual data
It can be used to compare against data collected by the researcher. This enables the researcher to place own findings within a more general context or alternatively, triangulate own findings.
d) Can result in unforeseen discoveries
Re-analysing secondary data can also lead to unforeseen or unexpected new discoveries (Dale et al, 1988). In the case of this project, this may be suffering of the public or worst affected groups as a result of the austerity measures. Thus policy makers can be advised on the social aspects of this change also.
e) Permanence of data
Unlike data collected by the researcher, secondary data generally provide a source of data that is both permanent and available in a form that may be checked relatively easily by others (Densccombe, 1998). This means that the data and researcher’s own findings are more open to public scrutiny.
Formulating Hypothesis
For this project, following hypotheses include ideas as the following:
UK can arrest rising debt by implementing fiscal consolidation (austerity measures).
Rising budget deficit coupled with relatively weak growth will translate into growing debt.
Rising debt may harm growth prospects in the UK by crowding out private investment.
Higher borrowing by the government will require higher interest rates, which stifle private capital accumulation and potential output.
Rising debt will entail higher servicing costs, putting additional pressure on budget balances.
Given the outlook of UK economy, the interest burden will significantly exceed the GDP growth rate, increasing the risk of Debt Trap.
Fiscal stimulus will not be sufficient to prevent government debt ratios from rising.
Extending citizens’ working lives by several years will ease budgetary pressure.
Radical and rapid structural adjustment in budget revenue and expenditure is required to be implemented from 2010 to achieve the 3% deficit ceiling of the EU Stability and Growth Pact by 2014/2015 financial year.
Rapid structural adjustment by high budget cuts may lead to double dip recession.
To make the relationship worthwhile, challenging and meaningful, I will need to state null hypotheses referred to as Ho which may prove that H1 predictions could be wrong such as :
Extending citizen’s working lives by several years never eases budgetary pressure
Rapid structural adjustment by high budget cuts never leads to double dip recession
There is no relationship between rising debt and economic growth .
Relationships between the variables will be manipulated to prove the validity of the hypotheses. The variable which will be manipulated is called the independent variable (cause) in this case the economy and the variable which is being measured or observed for differences (dependant variable/effect) is the deficit.
To check the effects of the austerity measures I am going to administer Likert Scale questionnaires to economists, public service leaders, private sector managers and the general public to collect quantitative and qualitative information relating to the following types of information:
facts, figures, knowledge, opinions, attitudes, motivations and lifestyles. This will be mainly primary data.
Quantitative Data Analysis
Descriptive Statistics will be used to evaluate the results of this research.
Qualitative Data Collection Method
Qualitative Data Analysis
Previous Experience of Research
Bibliography
Barrell, R., Hirst, I., Kirby, S., (2010), “ Financial crises regulation and growth”, National Institute Economic Review, vol 211, January 2010, pp29
Dale, A., Arber, S. And Proctor, M. (1988) Doing Secondary Analysis, London, Unwin Hyman.
Densccombe, M. (1988) The Good Research Guide, Buckingham, Open University Press
Dornbusch ,R., Fischer, S., Startz, R., (1998) , Macroeconomics, New York, Irwin/McGraw-Hill.
Easterby-Smith, M. , Thorpe, R. , and Lowe , A., (2002) Management : An introduction (2nd edn) , London , Sage.
Ghauri, P. and Gronhaug, K. (2005) Research Methods in Business Studies: A Practical Guide, Harlow, Financial Times Prentice Hall
Hakim, C., (2000) Research Design : Successful Designs for Sociological and Economic Research “2nd edn” London, Routledge.
Hakim, C., (1982) Secondary Analysis in Social Research, London, Allen &Unwin.
Johnson and Scholes (2003)
Kervin, J.B. (1999) Methods for Business Research , New York , HarperCollins.
Mintzberg, H. , Waters, J.A., (1982) “Tracking strategy in an entrepreneurial firm’, Academy of Management Journal, pp 465-99
Solow, R. (1957) , “Technical Change and the Aggregate Production Function”, Review of Economics and Statistics, August 1957.
Stewart, D.W. and Kamins, M.A. (1993) Secondary Research: Information Sources and Methods, Newbury Park, CA, Sage.
Walker, A. (2002) Living in Britain: Results from the 2000 General Household Survey, London , Stationery Office.