The purpose of this report is to

The purpose of this report is to
discuss, the impact that a hard Brexit will have on the key Macroeconomic
objectives of the UK government and how monetary and fiscal policies can be
used to achieve these objectives.What is a Hard Brexit?A
hard Brexit means that Britain abruptly cuts ties with the European Union without
negotiated trade agreements. In addition, a hard Brexit would mean an end to freedom
of movement of people, goods and services between the UK and EU countries. Freedom
of citizens to live and work in any EU country would be lost. Overall ‘dramatically
changing trading relationships with Europe’ (Full Fact 2017) will cause
business activity to become more difficult and this could have a substantial
effect on Britain’s economy.Four Key Macroeconomic Objectives
and How Brexit will affect them The four
most important objectives of any government are to have low unemployment, low
and stable inflation, high and sustained economic growth and a balance of
payments equilibrium.  Inflation is a key influence on the cost of living for everyone including businesses
therefore affecting consumer spending and business investment. The ‘rate of
inflation measures the annual percentage increase in prices’ (Sloman 2015). If inflation is high, consumer
spending tends to decrease as the cost of living increases. Inflation has been steadily increasing since the EU referendum result a
year 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 seen
from figure 1 that since March 2016 inflation has been gradually increasing due
to uncertainty around final negotiations. If a hard Brexit was to occur, this could
have an added negative effect on Inflation as tariffs imposed on imports coming
into the UK will cause an increase in the general price level of goods. For
instance, the new taxes on imported food can be expected to
add 14% to the cost of getting potatoes through customs (Politics.co.uk).

Figure 1-
Source: Tradingeconomics.com, Office for National StatisticsUnemployment- the
number of people unemployed is defined by economists as ‘those of working age
who are without work, but are available for work at current wage rates’ (Sloman
2015). Experts expect that unemployment will rise as a result of a hard Brexit.

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Firms may have to deal will higher costs for example export duties/ tariffs on
goods from the EU, therefore will be reluctant to take on new staff which will
incur 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 coming
months, as uncertainty over Brexit and the increasing input costs faced by businesses
weigh on jobs growth (The Guardian). Balance of
Payments- The flow of money going in and out, that occurs as a result of
trading with the rest of the world is ‘recorded in the country’s balance of payments
account’ (Sloman, 2015). A hard Brexit could result in a large loss of export
income from European countries as we leave the free market zone. Significant
areas that could be affected could be financial services which ‘accounted for around a third
of the UK’s £90bn of services exports to the EU in 2015. Our surplus on EU
financial services trade accounted for a quarter of our entire services export
surplus last year’ (Independent). If this income diminished as a result of
withdrawing from the EU this would create a large deficit for the UK. This was highlighted by the Bank of England, prior to the Referendum Britain
had a ‘record current account gap and the UK relies on foreign investors to fund the shortfall’ (The Guardian).

 Economic
Growth is something governments aim to
achieve over a sustained period of time. It is measured as ‘the percentage
increase in national output, normally expressed over a 12-month period’
(Sloman, 2015) or Gross Domestic Product (GDP). According to
the Organisation for Economic Co-operation and Development a hard Brexit would ‘wipe around £40bn off UK economic
growth by 2019’ (Independent). Economic Growth would undoubtedly slow initially
as a result of reduced economic activity and investment due to
uncertainty of consumers and businesses if we had a hard Brexit.Government Policies  Monetary Policy seeks to control aggregate demand by directly
controlling 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 is
achieved.This policy can
be used to increase interest rates in order to decrease consumer spending. After
a hard Brexit, if interest
rates were to rise, the cost of borrowing would increase. There will be
increased pressure on consumer income and therefore they would be more likely
to save money, bringing inflation back towards the target. The OECD advised the Bank of
England, which this month raised interest rates for the first time in a decade,
not to tighten monetary policy further because ‘wage pressures are low and
monetary policy should continue to be supportive amid the ongoing slowdown in
the economy induced by Brexit’ (Financial Times). 

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