United Kingdom - What happened in the economy between 2005 to 2012

In Australia recently, the cost of raising children has significantly increased. Two options were suggested to reduce the expenditure:

  1. To continue John Howard’s “baby bonus” scheme, or
  2. Lower the cost of education.

John Howard’s scheme would likely cause economic problems as a flat rate one-time payment was made to mothers on the birth of a child. The labor market is concerned that this scheme will act as a disincentive for mothers to work or return to work.  The scheme allows new mothers to stay at home and they could maximize their benefit prior to the year of the child’s birth.  This would adversely affect labor supply and productivity.  A fall in productivity will reduce the aggregate supply, thereby reducing both the real GDP and potential GDP.

If the second strategy is implemented, it would not affect the current labor supply.  Having affordable or free education is a good strategy compared to Howard’s scheme.  The economy will have a skilled workforce and higher productivity growth due to subsidized or free tertiary education. 

Higher productivity will increase the demand for labor. A rightward shift of the demand for labor will increase the wage rate. The LRAS curve will also shift to the right and increase the potential GDP.  This can be shown by the following diagram:


Free tertiary education will provide equal opportunity to all and this will have vast implications.  Subsidized education will ensure a skilled work force for Australia. Long run aggregate supply will shift and increase the potential output due to growth in productivity which will boost the Australian economy.


John Howard’s “baby bonus” scheme will create an economic inequality in the economy.

On the other hand, free tertiary education will definitely lead to a higher standard of living. This is due to more people becoming educated which will create a productive workforce that provides benefits to society. Affordable higher education for Australian children will cause higher levels of productivity and innovation


Question 3






In 2005 United Kingdom’s economic growth was driven by a rapid pace of consumption and the government’s expenditure was also encouraging. This was shown by a solid rate of economic growth along with approaching full employment levels. (Oxford Analytic, 2005).

The Australian economy performed exceptionally well during 2005. Economic growth remained high, unemployment came down to the 5% level and inflation also reached the targeted level. The Australian dollar remained strong and terms of trade reached its highest level.  Both household and business confidence stayed strong and housing prices picked up. Overall the economic outlook for Australia in 2005 was excellent with no output gap (Henry Thornton, 2005).

Global growth was pretty good in 2005. IMF has estimated the global growth 4.5%, though it was lower than the preceding year 2004.


When the Northern Rock British bank collapsed it coincided with the start of the global financial crisis. This was followed by the collapse of Lehman Brothers in 2008.  Economic growth had fallen drastically 2008-2009 (BBCNews,2013)

A moderate growth was achieved in Australia while half of the advanced economies contracted.  Australia still showed a slowed down in 2007 but was still in better shape than other economies due to the boost in exports and did not enter into a recession.


The UK economy fell into a severe recession during 2012. As the crisis in Europe intensive this reflected a steeper fall in economic activity for the United Kingdom.  This marked a noticeable impact on business activity. This was more prominent in the construction industry.  Manufacturing was also weak. Business confidence came down from 109.9 to 106.9. Aggregate demand remains weak and the economy has experienced mild contractions. Due to this there was a recessionary gap during 2012. (Larry Elliott and Heather Stewart, 2012).

The Australian economy showed strong economic growth during 2012 which was driven by the goods and services sector. The last 18 months of economic growth was largely contributed by consumption expenditure.  This would be consistent with the rise in real income and the fall in unemployment.

In 2012 the Australian dollar remained strong in the foreign exchange market. Mining and related investment activities supported this economic growth. The global recovery remained slow in 2012 due to a slowdown in the manufacturing sector.  (International Monetary Fund (2012)

Question 3B

 During 2005-2007 United Kingdom had good economic performance and was operating near the full employment level. There was an increase in economic growth every year and until it gradually approached full employment levels.

In 2008 – 2009, the United Kingdom economy experienced a drastic fall in economic output due to the severity of the financial crisis worldwide. The economy then started to recover however, enters into deep recession due to the Eurozone crisis in 2012.


The shift has shown by the output gap in AD-AS diagram. The economy was almost at near full employment level during 2005-2007 with very little or no output gap. But in June 2007, the first sign of the global crisis was felt by the collapse of Northern Rock Bank. The economy eventually entered into a recession with a significant reduction of economic activities and significant increases in the unemployment rate. The change is shown by the left ward shift of the AD curve from AD to AD”. The output gap gets larger overtime.


Question 3C

Australia was among some of the economies that held up better than other economies during the global economic meltdown. Australia’s resilience to the global financial crisis was due to the following major factors: strong export demand from China, the stability of Australian financial institution and its robust housing market (Ben Hillier,2010).

However UK was severely hurt by the recession. Consumption expenditure and industrial production decreased significantly.  There were huge job losses as the financial crisis hit. There was a drastic fall in real output and a sharp rise in unemployment. .

Evidence from the research shows that the United Kingdom was hurt more by the GFC in terms of the changes in real GDP and unemployment.



Larry Elliott and Heather Stewart, (2012), UK economy's fall into recession deeper than expected

International Monetary Fund (2012) World Economic Outlook October 2012 Coping with High Debt and Sluggish Growth

Oxford Analytical, (2005) Outlook for The U.K. Economy in 2005

Henry Thornton, (2005) Australian economy – 2005

BBC News, (2013), UK economy: The story of the downturn

Ben Hillier, (2010). Australia’s resilience during the global crisis, 2007-2009

Macro Economics Australia in the Global Environment Parkin Bade Pearson- p 135, p 304-305

Tejvan Pettinger (2014) Should University Education Be Free?

Growth and the Long-Run Aggregate Supply Curve

Peter Saunders (2008) Throwing the baby bonus out with the bathwater