Circular Flow of Income in the UK Economy
Globally, the covid 19 pandemic has seen to affect the economic conditions across many countries and it has been evident that the disruptions were massive enough to create unemployment and inflation across the globe. The effect of the pandemic on UK’s economy has been severe and every industries across UK has been stressed the supply chain and affected government income. The financial market, travel industry and other industries across UK has been massively affected due to the pandemic (Keogh-Brown etal 2020). After the global financial crisis 2008, this was one of the most significant crisis to affect the economic situation of the country. The following section of the report will evaluate the effect of lockdown on UK’s economic, major economic response of government, bank of England as well as will also denote the effect of brexit on UK’s economy.
To estimate the impact of covid 19 pandemic on UK’s economy, the understanding of circular flow of income is essential. As per the circular flow of income, as long as the money is flowing, the economy will continuously run and any disruption can cause severe slowdown in the economic condition. It has been found from recent studies that the covid 19 pandemic has affected different areas of economy. Regionally, different sectors of UK has affected the economic condition and has affected the circular flow of income in many countries. The following section discusses the circular flow of income in UK economy with the help of a diagram.
Without movement of the above factors, an interaction cannot occur and without the circular flow, it is possible that a system will eventually stagnate and thereby breakdown. The community has been found to affect the economic situation of the UK. Different business activities has been found to get affected by the covid 19 pandemic and the same has resulted in flow of information, flow of information, products and money. Based on the above circular flow of income, the following impacts of the covid 19 pandemic on UK’s economy can be understood.
Since the covid 19 pandemic has a strong territorial dimension, the impact of the covid 19 pandemic will vary significantly based on the fact that the health system, economic system and financial system can be massively affected post the pandemic. Primarily, different regions across UK has faced that the flow of goods become sluggish. Thereby, the supply chain, production and other dependencies has seen to affected the flow of goods and services. Within the economy, the domestic products has been also found to affect the supply chain and has created a disruption, derailing the flow of goods.
In UK, the current state of covid 19 crisis is compared with the 2008 global financial crisis since both of them has affected the stock market significantly and created a massive drop in the stock market. Further, there has been various factors associated with unemployment, uncertainties and flow of information in UK which caused the crisis to grow rapidly. The flow of money post the covid 19 has been accelerated due to the government intervention on stimulus package.
Impact of Covid-19 Pandemic on UK’s Economy
Increased debt level of the corporate sector has been also seen to impact the debt situation of Uk and has resulted in developing recession for prolonged amount of time. Further, it has been also found that the government is lacking the plan to reutilise and recapitalise the financial situation. Further, during the lockdown, it has been found that around 7.6 million jobs in UK are at risk during the pandemic due to the layoffs as well as reduction in the pay. The job loss has resulted in reduction in flow of money. Further, it has been also found that there are a number of government interventions, which needs to be understood in order to assess the impact of the covid 19 pandemic.
The government has faced a number of challenges in maintaining a proper balance between unemployment and labor market. However, the UK government has initiated job retention scheme that has adjusted and improved the economic situation of the country (Zhou etal 2020). Further, it has been also found that the government has initiated furlough scheme to improve the current levels of unemployment.
Further, to improve the current level of employment, the government has been seen to implement different schemes such as Coronavirus Job Retention Scheme and the self employment income support scheme which has been expected to improve the gross domestic product of the country (Pope, Dalton and Tetlow 2020). As per the Coronavirus Job Retention scheme, it has been found that the government is expecting to support the employers and is also assisting them to maintain their business. Further, the Self employment Income Support Scheme has been affected the business operations of UK.
To improve the circular flow of money and keep the economic situation running. Without fiscal support from the government of UK, it would have been a severe challenge for the UK economy to support for the recovery and improve the current situation of the pandemic. The government has injected 13.8 trillion of fiscal support and has supported the economy from health and economic risk. Further, the government of UK has been also found to announce recovery packages that will focus on projecting the unemployment level and vulnerability of population (Johansson and Henriksson 2020). This recovery package has been found to target priority areas and has been affected the strengthening healthcare system, infrastructure and digitalisation.
The government must explicit territorial dimension for the involvement of subnational government in early stage of implementation. Without understanding the areas in which the covid 19 has affected, the government will not be able to estimate the impact of the pandemic on the circular flow of income in the economy. Further, it has been also perceived that there is a urgent need to address the shift of carbon neutral economy and allocation of recovery funds to sustainable initiatives. Without concrete policy measures, it will not be possible for the government address the gaps between the intentions and policies thereby affecting the circular flow of income to significant extent (Brewer and Tasseva 2021). Further, it has been also found that the government is activating different financial instruments to improve and accelerate public investments. This includes improvement in self financing capacity, relaxing budget rules as well as increasing subsidies and transfers. Further public private partnership schemes can also improve the current financial situation of the country.
The Government’s Economic Response
Businesses, which are operating with 250 employees, are able to obtain refund from government for SSP. The government has also introduced loan guarantees which will facilitate the flow of credit towards the business. This can assist the small and medium enterprises in UK to improve the business condition and to improve the availability of finance in the future times. Further, it has been also found that the government has initiated various economic stimulus packages to improve the overall financial sector in UK. With the help of the Coronavirus Business Interruption Loan Scheme, any business with annual turnover of £45 million can be able to borrow £5million interest free loans from British Business Band. In this type of loan, the government has been seen to support, guarantee 80% of each loan, and has been seen to cover cost of the interest for first 12 months. Further, the government has also created the Covid 19 Corporate Finance Facility to provide funding support to the large companies and contribute further to the UK economy.
Further, the government has been also seen to incentivise the support the businesses and has suggested the business to keep their employees back from the furlough. Further, the government has also announced a second scheme denoted as Job Support Scheme to provide its employees with wages (Scott 2017). The government has also taken initiatives to support retail, hospitality and small businesses named as Retail, Hospitality and Leisure Grant Fund (RHLGF) offering grants to the business up to £25,000. In the year march 23, the government has further announced Coronavirus Business Interruption Loan Scheme (CBILS) which has been seen to support SMEs’ with funding facilities.
There has been also some offering by the government with relation to the Bounce Back Loan Scheme (BBLS) to support the small and medium companies during the year 2020. The loan has been found to offer £50,000 interest free loan to the small and medium businesses. The loan repayment date is up to 10 years and there has been some CBILS loan that can be transferred onto the scheme (Cowling etal 2021). Further, it has been found that the state has been successfully able to fund £15 billion of state aid. To support the large-scale businesses, the government has initiated a project termed as Project Birth which allowed in supporting the equity stakes of the business. To support charities and businesses, the UK government has provided £750 million packages. The government has also announced trade credit insurance that has allowed business to prosper forward after the pandemic. Some of the policies have also allowed to reduce the negative impacts of the covid 19 pandemic from the country. Further, it was also evident that some of the policies has kept the business afloat. These measures include support to the business, its employees and public during the pandemic (Sokolovska 2017). There has been various unprecedented steps taken by the government in order to support the government including £400 billion of direct funding support towards the economy. The same has allowed the economy to improve and safeguard employment levels and allowed it to improve consumer activity.
Job Retention Scheme and Self-Employment Income Support Scheme
Therefore, the abovementioned schemes provided by the government has been seen to restore the circular flow of money and has assisted the economy to flow at its regular pace. The fiscal support has assisted the UK government to meet the demand of the population and has seen to protect the economy. The government will be able to re-establish proper circular flow of income with the help of balancing the government spending, exports and investments. Injections can improve the flow of income and thereafter can allow in forming investments to support the economic situation post the covid 19 pandemic (Lezgovko and Jakovlev 2017).
The measures taken by Bank of England in response to the economic shock due to covid-19 is seen with implementing three policy commitments which are announced to address the timely and comprehensive package to assist the UK businesses to bridge the economic disruption which may seen to be associated with the Covid-19 stimulus package. The policy as published on 11 March 2020 is in response to the relevant measures for handling the challenges of Covid-19 which includes the relentless efforts of the NHS health professionals to excel in terms of health professionals to support the FCO to citizens who are coming aboard (Bailey et al. 2020). The relevant measures taken by the Bank of England has been identified with assisting the businesses in the UK to mange the economic shocks which may be large but temporary. The three-policy introduced by bank of England has particularly emphasized on the prevention of spread of risky asset and commodity process related to the spread of Covid-19. This has led to government yield reach all-time lows, thereby ensuring consistent degradation in the global outlook and UK growth indicators. The overall magnitude of the economic shock as a result of the Covd-19 has been seen to cover a vast magnitude of economic shock result in weakening of materiality and giving rise to uncertain activities. The significant and the temporary disruptions in the supply chain has been identified to significantly cause disruptions and result in weaker activity which can challenge the working capital and overall household demand in relation to the requirement of the working capital from the companies. These issues are further seen to affect numerous smaller businesses as well. This type of economic shocks has been evident to cause both demand and supply shock in the economy. The efforts taken by the MPC has been able to decrease the Bank rate and launching of new term scheme of scheme along with additional incentive for all the SMEs (Miranda-Agrippino, Hacioglu Hoke and Bluwstein 2019).
It is worth noting that the reduction in the rate of the bank has a direct relevance among the societies and banks to control the deposit rates and put a limit on the lending rates as well. For the purpose of mitigating the maximizing the overall effectiveness of monetary policy and reduce pressure of TFSME in the next 12 months the four-year funding has considered 5% shock of participants associated with the real economy and close bank rate. In addition to this, the increase in the overall rate of the lending has been focused for the SMEs (Aastveit, Albuquerque and Anundsen 2020). Moreover, the overall experience in form of the short-term funding has been able to assist the circular flow of income through reinforcing the overall transmission of real economy. This is a direct impact of the reduction in the overall rate of the banks as per the instruction of Bank of England. It is further worth noting that the participants are able proceed with a cost-effective funding source to aid additional lending and in the real economy and provide insurance during adverse market conditions (Bankofengland.co.uk.2022).
Fiscal Support by the Government
The overall impact of Brexit on the economy of the UK can be directly identified in terms of present assertions, which shows that the expansion in the economy has taken place, by 0.2% above the expectations. The UK voting to leave the EU be directly seen to be in referendum of the on 23rd June 2016 is further seen to affect the GDP of the small businesses and other businesses within the UK. The fall in the overall GDP is directly seen to affect the activities in the small businesses and consumers buying services or product. Therefore, the impact of Brexit in the economy of the UK is not only evident in terms of decline on the UK growth but also buying power of the consumers (Portes 2022). The main impact of the businesses in the UK has been seen to affect both the small consumers and big businesses. In addition to this, we are able to identify how the construction and the manufacturing industry has also suffered a declined to a tune of 0.8%. It is interesting to note that as a result of manufacturing significantly being affected by the Brexit, there has been sufficient evidence to suggest that it has resulted in the industries and larger business to include forward contract thereby allowing additional planning to prevent weakening of the economy. Some of the main examples may be further considered in form of big supermarkets and motor industry (Gudgin et al. 2018).
It is worth noting how the consumers and business need a sufficient certainty in relation to formulation of concrete and providing greater clarification to encourage the consumer and the business activities. In this regard, the overall impact of Brexit on the economy in the UK can be directly seen to be associated to plummet in the growth rate of the UK in the preliminary stages as result of the business leaving the EU. It is further worth noting how the various types of the small businesses may get affected in terms of coping up with future shocks. As per the recommendation given by the economists the diversification strategy taken by the businesses has enabled limiting the overall effect of the suppliers and customers getting into trouble (Pandzic 2021). Moreover, the reduction in the value of the pound can be associated to affect the supplier’s pricing. The implementation of forward contract has allowed the businesses to find the relevant solutions pertaining to the changes in the negotiation process and build certainty in the overall market. It is important to understand that the economy has not been affected overnight as a result of the overall consequences of Brexit. Moreover, we need to be taken into account the various types of the long-term consequences of the business which has also led to cause trouble for the small businesses (Smallbusiness.co.uk 2022).
Conclusion
On a concluding note, this paper has been able to estimate the effect of the pandemic on the circular flow of money in UK. The paper has been successfully able to analyse that the covid 19 pandemic has resulted in improvement in unemployment levels. Further, the GDP of the country has been also severely affected due to the pandemic. With response to the pandemic, the government has taken several initiatives (fiscal support) to progress through the pandemic. Further, it has been also found that the bank of England has provided borrowing and debts to stimulate the current economic situation. It is worth noting how the consumers and business need a sufficient certainty in relation to formulation of concrete and providing greater clarification to encourage the consumer and the business activities. Therefore, actions in this regard are needed to be taken in order to reduce the severe consequence of the covid 19 pandemic in UK.
To progress forwards post the impact of the covid 19 pandemic, it is essential to follow the following recommendations
- The pertinent changes in the economy of the UK will need to implement workers trainings, agendas focusing on the growth. Workers training will be assisting the economic situation progressively and will sustain employment within the country.
- Further, the government will have to focus on sustaining employment and will have to support for productivity in future times. Without the renewed funding facility, it might become a failure in fiscal policymaking. The current immigration policy will have to focus on long-term growth and will need to focus on additional federal; funding to overcome the existing problem.
- The government will also have to focus on public research and development to overcome funding problems and will improve different sectors significantly. Local government will also need to be encouraged and understood in order to evaluate the cost of training programs.
- Evaluate the current state of job creation within the economy and understand the areas in which jobs will be needed to created and benefitted.
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