The UK economy has undergone structural, financial, and political change over the last thirty years. Different ideologies and policies have served to shape the relationship between government and economy in varying directions. Some elements, such as state intervention, have remained as a point of debate. Other factors, like globalization, have just recently developed. The policy of UK governments as a whole has been shaped quite heavily by major economic events during this period, and the legacy left by the Conservative and Labor governments can still be seen today.

First, it is key to outline the characteristics of the relationship the government and the economy share. A government influences the way an economy works via its policies. The government uses two branches of policy, fiscal and monetary. Fiscal policy entails government spending whereas monetary policy involves manipulation interest rates. Both policy instruments are designed to achieve growth.

The attempts of a government to influence economic activity in the national economy are defined as macro-economic measures. Even the government itself is run as a typical business in a free market economy. It has a limited budget, and it has to prioritize quality and cost. It sets itself certain monetary and economic targets which it aims to meet each financial year. The state also plays a crucial role in providing a welfare state, where transfer payments are an important part of a circular flow of an economy. Transfer payments are aid given to people who are unemployed, or for any other reason, are economically inactive. Aside from this, the government will play other roles of importance. The regulation of markets and the encouragement of competition and entrepreneurship are all different areas in which the government contributes to the economy. If you break the relationship down further to involve the firms, the government still maintains influential involvement.

The Keynesian orthodoxy collapsed in the face of a persistent and unpredicted rate of inflation. Each ideological change brought about it’s different effects on the relationship between government and economy. To generalize the change before and after 1979, it is appropriate to state that the size and style of government had changed, from big to small.

Big government, where regulation of markets, state intervention and command economics were the central characteristics, had been abolished. In came small government, where practices such as deregulation, privatization and free market economics were encouraged and integrated. Under small government, the state would take a step back from economic affairs, and adapt, to a small extent; a ‘laissez-faire’ approach. This change in government would be preferred by business and other capitalists. Certainly, this change was a landmark event in the economic theory of the state, and would shape the economic policies of the following governments.

The tenures of Thatcher and Blair may have been under different parties, but towed the line of small government, less government intervention. A new wave of neo-liberal or neo-classical practice had begun. The change in government style has been noted. Now, the effects of this change need to be assessed, and more importantly, the critical elements need to be analyzed.

The argument over whether the state should intervene in the country’s economy has been a drawn out affair. Certainly, under the new Thatcher government in the early 80’s, state intervention in economic matters was the norm.

The Financial Crisis of 2007 saw Labor bring the Royal Bank of Scotland, Northern Bank and Lloyds TSB into government ownership. The government was forced to pump emergency funds into the banks to restore confidence in the banking system and to avoid a complete collapse. The need for government intervention wasn’t favored by either the banking sector or the general public, but this intervention was one of the risks which came with a free market economy.

As free market economies involve little regulation, the banks in this case, went past many of their remit when it came to what practices they could and should carry out. In such an economy, it is often assumed that the market should be left to regulate itself, but such an assumption failed completely here. Alongside the banking crisis, the government was forced to introduce other macro-economic measures, such as quantitative easing designed to increase money supply and consumer spending, and other more micro-economic based measures such as the car scrappage scheme, which concentrated on boosting car sales. Government intervention was quite successful during this period, with Britain return to relative growth by 2009 and the banking sector beginning to recover.

Another aspect of political economy which has developed over the last thirty years is globalization. The global economy has undergone significant change over the last few years, with workers and businesses all around the world being influenced by events happening in other parts of the globe. Trade and labour are some of the key parts of how globalization has developed. Trade between countries has grown quite extensively, with the European Union a good example of how trade relations have lengthened. Also, companies are now beginning to locate businesses abroad because of cheap labour and favorable tax incentives. All these events have led to a rapid rise in global economic theory and policy.

Ironically, globalization can also be classed as an argument for state intervention. Globalization will lead to some businesses failing due to increased competition – more reason to support other firms which could be successful in the future. The advancement of globalization has led to a decrease in the influence of government and moved up a notch, the power of business in national economies.

In conclusion, over the last thirty years, the relationship between government and economy has fluctuated many times. The policy and style of government, and other external crises’ and events have led to different styles in handling public sector economics. External events such as the financial crisis and globalization have brought up the debate of the free market and whether attempts to keep the government in the background will ever be successful.

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