The purpose of this report is to

The purpose of this report is todiscuss, the impact that a hard Brexit will have on the key Macroeconomicobjectives of the UK government and how monetary and fiscal policies can beused to achieve these objectives.

What is a Hard Brexit?Ahard Brexit means that Britain abruptly cuts ties with the European Union withoutnegotiated trade agreements. In addition, a hard Brexit would mean an end to freedomof movement of people, goods and services between the UK and EU countries. Freedomof citizens to live and work in any EU country would be lost. Overall ‘dramaticallychanging trading relationships with Europe’ (Full Fact 2017) will causebusiness activity to become more difficult and this could have a substantialeffect on Britain’s economy.Four Key Macroeconomic Objectivesand How Brexit will affect them The fourmost important objectives of any government are to have low unemployment, lowand stable inflation, high and sustained economic growth and a balance ofpayments equilibrium.  Inflation is a key influence on the cost of living for everyone including businessestherefore affecting consumer spending and business investment.

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The ‘rate ofinflation measures the annual percentage increase in prices’ (Sloman 2015). If inflation is high, consumerspending tends to decrease as the cost of living increases. Inflation has been steadily increasing since the EU referendum result ayear ago, which triggered a sharp drop in the value of the pound and pushed up the cost of goods imported from abroad (The Guardian).  It can be seenfrom figure 1 that since March 2016 inflation has been gradually increasing dueto uncertainty around final negotiations. If a hard Brexit was to occur, this couldhave an added negative effect on Inflation as tariffs imposed on imports cominginto the UK will cause an increase in the general price level of goods. Forinstance, the new taxes on imported food can be expected toadd 14% to the cost of getting potatoes through customs (Politics.co.uk).

Figure 1-Source: Tradingeconomics.com, Office for National StatisticsUnemployment- thenumber of people unemployed is defined by economists as ‘those of working agewho are without work, but are available for work at current wage rates’ (Sloman2015). Experts expect that unemployment will rise as a result of a hard Brexit.Firms may have to deal will higher costs for example export duties/ tariffs ongoods from the EU, therefore will be reluctant to take on new staff which willincur additional wage costs.

This is supported by Suren Thiru, the head of economics at the British Chambers of Commerce,’it is likely that UK unemployment will start to drift upwards in the comingmonths, as uncertainty over Brexit and the increasing input costs faced by businessesweigh on jobs growth (The Guardian). Balance ofPayments- The flow of money going in and out, that occurs as a result oftrading with the rest of the world is ‘recorded in the country’s balance of paymentsaccount’ (Sloman, 2015). A hard Brexit could result in a large loss of exportincome from European countries as we leave the free market zone. Significantareas that could be affected could be financial services which ‘accounted for around a thirdof the UK’s £90bn of services exports to the EU in 2015. Our surplus on EUfinancial services trade accounted for a quarter of our entire services exportsurplus last year’ (Independent). If this income diminished as a result ofwithdrawing from the EU this would create a large deficit for the UK.

This was highlighted by the Bank of England, prior to the Referendum Britainhad a ‘record current account gap and the UK relies on foreign investors to fund the shortfall’ (The Guardian). EconomicGrowth is something governments aim toachieve over a sustained period of time. It is measured as ‘the percentageincrease in national output, normally expressed over a 12-month period'(Sloman, 2015) or Gross Domestic Product (GDP). According tothe Organisation for Economic Co-operation and Development a hard Brexit would ‘wipe around £40bn off UK economicgrowth by 2019’ (Independent). Economic Growth would undoubtedly slow initiallyas a result of reduced economic activity and investment due touncertainty of consumers and businesses if we had a hard Brexit.Government Policies  Monetary Policy seeks to control aggregate demand by directlycontrolling the money supply or by altering the rate of interest (Sloman 2015).This policy is used to ensure the inflation target set by the UK Government isachieved.This policy canbe used to increase interest rates in order to decrease consumer spending.

Aftera hard Brexit, if interestrates were to rise, the cost of borrowing would increase. There will beincreased pressure on consumer income and therefore they would be more likelyto save money, bringing inflation back towards the target. The OECD advised the Bank ofEngland, which this month raised interest rates for the first time in a decade,not to tighten monetary policy further because ‘wage pressures are low andmonetary policy should continue to be supportive amid the ongoing slowdown inthe economy induced by Brexit’ (Financial Times). 

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