What was the impact of the UK government’s austerity fiscal policy and the Bank of

England’s quantitative easing monetary policy on macroeconomic indicators,

particularly unemployment and inflation, following the 2008 financial crisis?

Nita Vasadze

After 2008 the whole world was surrounded by economic downfall and the United Kingdom
was no exception. To overcome this crisis and stabilise the economy UK government and
the Bank of England had to implemented different macroeconomic policies. The government
introduced an austerity policy that reduced government spending and increased taxes, while
the Bank of England adopted a quantitative easing policy that involved the injection of
liquidity into the financial system. This research investigates the results and impact of these
policies on key macroeconomic indicators, particularly unemployment and inflation.

The theoretical biases of this research are founded on the official website of the Bank of
England, research, reports, and articles developed by professional authors working in “The
New York Times”, “UCL”, and “Oxfam”, discussing the need and different aspects of
austerity and quantitative easing policy. Furthermore, the research makes use of official
statistical data given by “Trading Economics”.

The study's nature is qualitative as well as quantitative. An in-depth analysis of the

information provided on official websites is one of the methods utilized in the qualitative part
of this research to draw logical conclusions. On the other hand, gathering and analyzing
numerical data was the methodology employed for quantitative research. This becomes
clear when data from "Trading Economics" is discussed and studied.

In 2007 the most severe worldwide economic crisis since the Great Depression struck. This
was a Global Financial Crisis and it worsted most countries' economies, especially the UK.
The cause of this crisis was that until 9 August 2007, there were heavily expanding
mortgage businesses that were funded by banks raising money from the interbank
wholesale market. In the UK bank Northern Rock and some other banks in the US
developed a new business model for banking. They no longer depended on deposits to fund
mortgages. They originated mortgages and, via a process known as securitization,
transformed them into marketable securities in place of traditional lending. They created new
financial products, Mortgage-Backed Securities (MBS) and Collateralized Debt Obligations
(CDO), which were mortgages bundled together in a complex system. These securities,
which were offered to investors in the financial markets, reflected the cash flows from
mortgage repayments. By the summer of 2007, worries over the quality of mortgages,
particularly those given to subprime borrowers with bad credit histories, had caused the
credit markets to freeze1 (Turner 2023). During this time securitization was already an
indivisible part of banks and 75% of mortgages were funded by it. Therefore, the freeze
caused global panic and major US banks filed for bankruptcy. This had a significant impact
on the United Kingdom’s economy. Major banks collapsed and the economy was in
recession which was characterized by a prominent contraction in GDP.

1 Turtner, John. 2023. “Why Did the Global Financial Crisis of 2007-09 Happen?” Economics Observatory.
September 4, 2023. https://www.economicsobservatory.com/why-did-the-global-financial-crisis-of-2007-09-
happen.
The United Kingdom was left with a crippling economy and budget deficit which was growing
to unsustainable levels. To overcome these issues several macroeconomic policies were
implemented by the government and national bank of the UK. One of the most important
was the Austerity Fiscal policy issued by Britain’s conservative government. In general, there
are 3 different ways of implementing austerity measures, which are either imposing higher
taxes to help government spending; raising taxes while cutting down government spending,
or lowering taxes and lowering government spending as well 2 (Raisin UK 2024). The British
government took the second way, they focused on cutting down government spending along
with raising taxes to help their budget deficit.

Government spending was cut short all across British society except, for education and the
National Health Service. The police, courts, libraries, jails, road maintenance, and senior
housing aid all saw budget cuts. Revenue for local governments plummeted. According to
the New York Times article about this topic by (Mueller 2019) 3, Conservative Party leaders
framed these budget cuts as a positive spot towards creating the “Big Society” as they called
it. They suggested that reducing the size of government and cutting bureaucracy which was
seen as bloated, would create more space for charities, grassroots organisations, and
private companies that could help provide public services.

However, there was a disagreement on the efficacy and significance of austerity measures.
Supporters of austerity believed that the policies were vital for long-term financial stability
and economic recovery, while critics claimed they could have negative effects. For instance,
an increase in inequality, a reduction in public services, and slower economic development.
Additionally, there is a lot of evidence in favor of critics. It increased the gap between social
groups, the lower class of Britain was living in extreme poverty because of increased taxes
and workforce reduction as a result of decreasing government spending. This had a direct
impact on the rise of the United Kingdom’s unemployment rate.

In 2004 unemployment was at a very low point, 4.7% in 2004. However, it rose above 7%
since 2009, reaching 7.9% in 2012. Between May 2009 and August 2013, 760000 more
people were unemployed hitting 2.51 million in total. These are disastrous results, which
indicate how tragic the austerity policy was for the UK. Of course, it had advantages as well
but several people struggling for their lives was undeniable. Youth and long-term
unemployment rates also stayed high and reached historically high levels. The income of
unemployed people also went through a significant decrease. Those who were part of the
labor force were not paid well, with many new jobs being temporary or self-employed,
leaving workers with fewer rights and stability. This was all caused because the austerity
policy did not help the aftermath of the financial crisis and in actuality, it worsened many
people's living conditions (Oxfam 2013)4.

The graph below is from Trading Economics5 and it displays data on the United Kingdom's
Unemployment Rate. Showing how unemployment hit the highest rates in the last 25 years
2 Raisin UK. 2024. “Austerity.” Raisin. 2024. https://www.raisin.co.uk/finance-glossary/austerity/.
3 Mueller, Benjamin. 2019. “What Is Austerity and How Has It Affected British Society?” The New York Times,
February 25, 2019. https://www.nytimes.com/2019/02/24/world/europe/britain-austerity-may-budget.html.
4 Oxfam. 2013. “THE TRUE COST of AUSTERITY and INEQUALITY UK Case Study Pre-Crisis UK.”
https://www-cdn.oxfam.org/s3fs-public/file_attachments/cs-true-cost-austerity-inequality-uk-120913-en_0.pdf.
5 Trading Economics. 2023. “United Kingdom Unemployment Rate.” Tradingeconomics.com. TRADING
ECONOMICS. October 2023. https://tradingeconomics.com/united-kingdom/unemployment-rate.
after the financial crisis. Therefore, indicating a clear relationship between austerity policy
and unemployment rates (Trading Economics 2023).

Another macroeconomic policy that was introduced by the Bank of England (BoE) because
of the contraction in money supply was quantitative easing, a monetary policy. QE 6 requires
the BoE to issue new money to buy financial assets on the secondary market, most of which
were UK government bonds, or gilts. This procedure, which is best described as a "portfolio
switch," involves moving government bonds from the balance sheets of bond owners—such
as insurance companies or pension funds—to the balance sheets of the BoE's Asset
Purchase Facility, a subsidiary of the BoE, and replacing them with freshly created deposits.
The newly made deposits are backed by an increase in central bank reserves maintained at
commercial banks as part of this procedure. By raising the amount of money in the
economy, lowering medium-term interest rates, and boosting the amount of accessible
reserves held by commercial banks at the BoE, quantitative easing was designed to
stimulate spending and economic development (Deleidi and Mazzucato 2018).

Quantitative easing played a significant role in recovering and supporting the UK’s economy
after the crisis. It prevented a deeper recession by providing liquidity to banks. It led to a
reduction in interest rates on government bonds and other long-term borrowing rates. This
made it cheaper to borrow for everyone, businesses and consumers. QE contributed to
rising asset prices which included stock and real estate. This boosted consumer’s
confidence and encouraged investment and spending.

On the other hand, the primary concern that was associated with quantitative easing was the
risk of inflation because of an increase in money supply. However, in the years after QE was
implemented, inflation stayed comparatively low. In actuality, the UK went through a phase
of low inflation. Where inflation rates fluctuated around the Bank of England's target of 2%.
As shown in the graph below7, where the United Kingdom’s inflation rate is displayed, in the
year right after the financial crisis inflation decreased and was stabilized for a while,
6 Deleidi, Matteo, and Mariana Mazzucato. 2018. “The Effectiveness and Impact of Post-2008 UK Monetary
Policy Quantitative Easing: The Theory.” UCL. https://www.ucl.ac.uk/bartlett/public-purpose/sites/public-purpose/
files/iipp-pb-03-qe-16-08-2018.pdf.
7 Trading Economics. 2023. “United Kingdom Inflation Rate.” Tradingeconomics.com. TRADING ECONOMICS.
2023. https://tradingeconomics.com/united-kingdom/inflation-cpi.
Therefore, we can say that the quantitative easing policy was very successful and it
accomplished its goal of supporting economic recovery.

To sum up everything that has been started so far, it is very clear that the Global Financial
Crisis left its mark on the UK, and to overcome this problem, the government and the Bank
of England took drastic measures, which were new macroeconomic policies, austerity, and
quantitative easing. However, not both of them turned out very helpful. Austerity policy
caused more problems in society by increasing unemployment rates but QE reached the
Bank of England’s target and lowered inflation rates. Therefore, we can conclude that fiscal
and monetary policies are created to better the economy of the country but there are times
when they are not successful.

Bibliography

Bank Of England. 2023. “Quantitative Easing.” Bankofengland.co.uk. Bank of England.

January 31, 2023. https://www.bankofengland.co.uk/monetary-policy/quantitative-easing.

Deleidi, Matteo, and Mariana Mazzucato. 2018. “The Effectiveness and Impact of Post-2008
UK Monetary Policy Quantitative Easing: The Theory.” UCL.
https://www.ucl.ac.uk/bartlett/public-purpose/sites/public-purpose/files/iipp-pb-03-qe-16-08-
2018.pdf.

Mueller, Benjamin. 2019. “What Is Austerity and How Has It Affected British Society?” The
New York Times, February 25, 2019.
https://www.nytimes.com/2019/02/24/world/europe/britain-austerity-may-budget.html.
Oxfam. 2013. “THE TRUE COST of AUSTERITY and INEQUALITY UK Case Study Pre-
Crisis UK.” https://www-cdn.oxfam.org/s3fs-public/file_attachments/cs-true-cost-austerity-
inequality-uk-120913-en_0.pdf.
Raisin UK. 2024. “Austerity.” Raisin. 2024.
https://www.raisin.co.uk/finance-glossary/austerity/.

Trading Economics. 2023. “United Kingdom Inflation Rate.” Tradingeconomics.com.

TRADING ECONOMICS. 2023. https://tradingeconomics.com/united-kingdom/inflation-cpi.

Trading Economics. 2023. “United Kingdom Unemployment Rate.” Tradingeconomics.com.

TRADING ECONOMICS. October 2023.
https://tradingeconomics.com/united-kingdom/unemployment-rate.

Turtner, John. 2023. “Why Did the Global Financial Crisis of 2007-09 Happen?” Economics
Observatory. September 4, 2023. https://www.economicsobservatory.com/why-did-the-
global-financial-crisis-of-2007-09-happen.