From this it is a relatively small jump to the issues that come under the umbrella title of micro economic policy.

As Chapter 5: Microeconomic Policy explains, this embraces areas such as the location of industry, competition policy and industrial strategy. Stretching the definition even more widely, government has responsibility to protect its citizens against market failure, in areas such as pollution, health and safety and, particularly recently, financial risks. (See Social/Political Responsibilities below).

How far governments should introduce regulations on these issues is largely a political decision. Currently, there are accusations that the competitiveness of UK industry is being undermined by the introduction of a raft of new regulations across a wide spectrum of activity, some at the behest of the European Union, which add to industry’s cost base.

For the first 35 years of the post-1945 period, successive governments tried to manage most aspects of the country’s economic affairs, such as growth, unemployment, the balance of payments, etc.

The priorities for any particular government were determined by its political outlook and by the situation it inherited or had to handle. Most governments, whatever their original intentions, find themselves prisoners of circumstances.

The Labour government under Harold Wilson in the 1960s, for example, had to sacrifice growth and employment ambitions because of balance of payments and exchange rate constraints. Similarly, Edward Heath’s Conservative government of the early 1970s gave up on its non-interventionist policy as unemployment and inflation rose.

The so-called postwar consensus broke down at the end of the 1970s under the weight of accelerating inflation, rising unemployment, slow growth and ballooning public sector debt.

After a series of false starts, a new basis of macroeconomic management evolved in the 1990s.

Government ambitions now seem more modest. The key objective, espoused under both Conservative and Labour governments is to create a stable environment, to consign ‘boom-bust’ and stop-go’ to the history books. The management of inflation is at the heart of achieving stability.

Not only is the ambition more limited than in the past but so also is the means of achieving it. Macroeconomic management for most of the last 20 years or so has relied largely on monetary policy.

Statutory controls such as prices and incomes policies have long fallen by the wayside and fiscal policy is used for other purposes. Monetary policy itself has become more clearly defined, referring to interest and exchange rate movements rather than money supply.

A key measure introduced by Chancellor Gordon Brown in May 1997 in effect passed day-to-day control over the economy from the Treasury and the politicians to the independent Governor of the Bank of England and the other eight members of the Monetary Policy Committee.

Although Mr Brown’s fiscal priorities (his two Rules) were part of the policy mix aimed at creating stability, the primary responsibility no longer belongs to government.

The services for which the governement is responsible include parks, libraries, education, roads and defence.

Policies relating to defence, education and transport have been subjects of intense political debate and they remain areas in which central government continues to be the dominant influence.

With the exception of defence and law and order, however, the public sector is not a monopoly supplier of many important services. Alongside the National Health Service and state education system, for example, to which everyone has access, sit private health schemes and private schools.

For these services, private organisations make charges to the user which are in addition to the contributions they make to the state services through general taxation.

As with macroeconomic management, the role of government in the provision of goods and services has undergone a profound transformation in the last two decades.

The first postwar Labour government embarked on a programme of nationalisation that brought into public ownership key industries such as energy supply (coal mines, electricity and gas supply), the railways and the steel industry.

This gave the government considerable control (in terms of prices, investment and employment policies) over a substantial proportion of the economy.

The idea of a ‘mixed’ economy was at the heart of the postwar consensus to the extent that, the steel industry apart, there was little that Labour nationalised which the Conservatives reversed.

By the end of the 1970s, however, serious questions were raised about the influence the public sector was exerting on the private sector (crowding out) and the poor industrial/financial record of the nationalised industries.

During the 1980s, therefore, the Conservative government undertook an ambitious and controversial programme of privatisation. Starting in 1983 with BP, British Aerospace, Amersham International, Britoil, Cable and Wireless and AB Ports, the government began a series of share floatations which offered, to the public, stakes in previously nationalised businesses.

The final Conservative privatisations were in 1996, with British Rail and British Energy.

Table 10.2: Timetable of Privatisations

Just as the Conservatives left most of Labour’s 1945-50 nationalisations intact (until the 1980s at least), so the post-1997 Labour Government has not undone the privatisations of its predecessor. In fact, it has extended the process (in a slightly different format) by transferring the air traffic control system (NATS) to the private sector.

Compared with previous Labour governments between 1945 and 1979, therefore, this government accounts for a smaller share of national activity as a buyer and seller of goods and services.

Consequently, as an employer, producer, investor, and so on, the government’s role has also been much reduced by privatisations.

At the same time, the government could argue that it still exercises significant control over these major utilities.

Acknowledging that private sector skills and disciplines can help to deliver more efficient services to the consumer, and that a number of previously nationalised entities have to compete on a global basis (for example BA and BT), has persuaded this Labour government to resist the temptation to re-nationalise.

Instead a series of industry-specific regulatory bodies (such as OFTEL, OFWAT, ORR and OFGEM) oversees all aspects of the utilities’ operations.

In effect, there is a recognition that control (albeit through third parties) is more important than ownership in achieving the government’s objectives.

As a buyer and seller of goods and services, this government has greatly expanded an idea that originated with the previous Conservative administration.

Despite abandoning Clause Four of its constitution (taking into public ownership the means of production, distribution and exchange), New Labour still believes the public sector has a pivotal role to play in the provision of key services. To improve efficiency, it also believes the private sector has a contribution to make.

This has led to the widespread adoption of Public-Private Partnerships (PPP) the genesis of which goes back to the Major government’s Private Finance Initiative (PFI).

It is used particularly for major capital expenditure projects and brings in private sector funding and management to build assets for use by the public sector. Rather than pay for the building work on completion, the private sector project managers are paid over the life of the asset, sometimes according to usage.

In effect the public sector is leasing or renting from the private, whilst the private sector takes on more risks than if it was only involved in the building work.

PPP - control rather than ownership is key

Although many traditionalists dislike the PPP approach, it is a logical extension of privatisation. It is based on the view that the role of government is not to build and own assets but to ensure that the services the public expects are in place, to the appropriate standard and at an acceptable price.

Who owns a building or a motorway is irrelevant so long as the government exercises control over standards and costs. In this respect, it is analogous to the role of the regulators of the privatised utilities, that control rather than ownership is the key issue.

PFI funding difficulties

The current global financial crisis presented PFI with difficulties because many sources of private capital dried up. Nevertheless, the process remains the UK government's preferred method for public sector procurement.

In January 2009 the Secretary of State for Health, reaffirmed this commitment with regard to the health sector, stating that “PFIs have always been the NHS’s ‘plan A’ for building new hospitals … there was never a ‘plan B’. Because of banks' unwillingness to lend money for PFI projects, however, the government has been in the position of having to fund the so-called 'private' finance initiative itself.

In March 2009, it was announced that the Treasury would lend £2bn of public money to private firms building schools and other projects under PFI. In a written statement, the Chief Secretary to the Treasury claimed that the loans should ensure that projects worth £13bn — including waste treatment projects, environmental schemes and schools — would not be delayed or cancelled. It was also promised that the loans would be temporary and would be repaid at a commercial rate. But the Liberal Democrats Treasury spokesman argued that the government should return to more traditional public financing structures rather than propping up PFI with public money.

PFI projects increasing

To date, PFI is playing a limited but significant part in public sector capital investment, accounting for 11% of total investment in public services. Both the number and total capital value of PFI projects has increased since 1995, from nine projects valued at £667 million to over 641 projects with a contractual value of £63.8 billion spread over an average of 26 years as at April 2009. The most popular area for PFI projects are new or refurbished schools, prisons, hospitals, transport, waste and water and local authority projects.

In effect, the authorities try to bring about changes that would not happen without official intervention. Since the rationale for such actions are social or political, the economic consequences are of secondary importance.

Examples of government intervention

Restrictions on smoking (such as tobacco advertising, high rates of tax on the selling price of cigarettes and, most recently, a ban on smoking in enclosed public places) is a relatively modern example of government action for political or social motives, as is the abolition of fox hunting.

It is clear that those involved in the manufacture and distribution of tobacco products will be adversely affected by the advertising ban which is intended to cut consumption, while the Countryside Alliance believes it has made the economic case for hunting. In neither instance, however, did the argument for government action depend on the economic merits.

A similar logic underpins a welter of other regulations covering the environment, health and safety in the workplace and industry specific controls such as food standards and car emissions.

Where the micro economic policies referred to in Political Priorities above generally refer to measures which try to encourage certain economic activities (regional and industrial policies), by and large these regulations limit what companies and individuals can do and set minimum standards.

Help for specific groups

Probably the most important action the government takes under this heading is to implement commitments to help particular groups in society (most commonly the old, the infirm and the generally disadvantaged).

Again, this is a political stance taken by the party in office and rarely is the case based on improving economic efficiency or raising economic performance. Rather, the principle of redistribution is based more on concepts of ‘fairness’ and ‘equality’ and the most effective mechanism for achieving this goal is taxation. (See 12 Social Framework.)

Use of taxation to equalise disparities

Progressive taxation, particularly through income tax (and to a lesser extent Capital Transfer Tax or death duties) has been the favoured instrument for trying to equalise disparities in income and wealth. This reached its apogee under the late 1970s Labour government when the marginal rate of income tax exceeded 100%.

By most peoples’ reckoning, this was something of a disincentive, and a major part of the Conservatives’ supply side reforms of the 1980s was to simplify the tax system and to bring down the top rate to 40% (by 1988).

Following the American example under Ronald Reagan, the view was taken that lower tax rates would help to raise tax revenues, partly by making the economy perform more efficiently and reduce incentives for tax avoidance.

Over time there has, in addition, been a shift in the distribution of the tax burden away from direct to indirect taxation. (See 10.3 Sources of Government Revenue).

Comparable reforms were introduced for corporate taxation, with a view to encouraging enterprise.

While committed to reducing inequalities and creating ‘a fairer society’, the current Labour Government has taken steps to reform the basis of welfare provision.

Anxious to break the ‘benefits culture’ (the system which encouraged claimants to take benefits without working), ex-Chancellor Brown also took tentative steps down the American road by providing benefits to those in work whose income falls below certain thresholds.

Staying out of work and on benefit has been made more difficult.

Transfer payments such as social security benefits, unemployment relief and pensions are made to individuals. Such payments account for a large proportion of government spending (almost a quarter) and they are payments for which no current direct economic service is provided in return.

Transfer payments are distinct from payments to public sector workers, such as firemen and policeman.

Government spending is the sum of:

• government purchases of goods and services (such as the salaries of teachers, policemen and firemen) and
• transfer payments (social security and unemployment benefits and interest payments on government borrowing).

According to the OECD, transfer payments in the UK account for 20% of GDP (and goods and services for 21%).

In the US, transfer payments are 16% of GDP, in Germany 27% and France 32%.

Whether the shares in some countries are higher because benefits are too high or there are too many claimants, or whether the GDP denominator is too low because of high benefit payments/too many claimants is a contentious political issue.

What can be said, however, is that pensions apart, much of the spending on transfer payments is the cost of economic failure.

Although its role of transferring money from one group in society to another is largely uncontroversial (apart from the fact that it has become so complicated that some people both pay tax and receive benefit), the government has recently been questioning the method of payment.

To reduce fraud, the authorities have tried to develop a smart card for claimants and to persuade the banks to open accounts for the disadvantaged groups that would not normally meet the banks’ criteria.

This would enable the transfer payments to be paid directly into the claimant’s account, a proposal that has met resistance from several quarters.