Aug 7, 2020 in Comparative Essays

Jacob's & Tonnies' Theory

A Comparison of Monetary and Fiscal Policies of the UAE and the UK

Most world economies are run almost in a similar fashion by their respective governments. Thus, a country's government lays down monetary and fiscal policies to help run the economy efficiently. These policies allow the economy stay at equilibrium for a country to achieve growth. This essay aims at discussing the comparison between the monetary and the fiscal policies of the United Arab Emirates and the United Kingdom.

Description of the UAE and the UK

The United Arab Emirates (UAE) is located in the Persian Gulf. Seven Emirates form a federation with the capital in Abu Dhabi. As stated in the report made by Central Bank of the UAE (2014), the UAE population stood at 9.346 million and relied on a simple economy as nomadic farming, fishing, pearling and seafaring before the discovery of oil in the region. The United Kingdom is found in the northwestern coast of the European mainland. It is made up of Northern Ireland, Wales, Scotland, and England (OECD, 2015). According to OECD (2015), the population of the United Kingdom is estimated to be 64.6 million; being an industrialized country, the UK relies on manufacturing.

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Key Macroeconomic Variables

The UAE and the UK Gross Domestic Product (GDP)

In 2015, GDP of the United Kingdom was recorded at $2,848.76 billion (Trading Economics, 2016). It has registered an average of $1,081.01 billion since 1960 up to 2015. The economic growth of the United Kingdom has slowed over the last year due to the Brexit referendum. While service industry has continued to expand, manufacturing and construction have struggled to grow. At the same time, GDP of the UAE stands at $370.29 billion, according to 2015 report, maintaining an average of $120.26 billion since 1973 (Trading Economics, 2016a) and making it one of the highest growth rates globally.

UAE and UK Per Capita

As of 2015, GDP per capita was estimated at $46,478.84 for the United Kingdom (Statistica, 2016). This was recorded as a 0.4% decrease from the previous year. On the other hand, in 2015, the UAE had GDP per Capita at $66,102.19. This has been an average of $90,339.78 since 1990 till 2015 (Trading Economics, 2016b). However, from 2006 to 2010, it was on a downtrend due to oil slump, but it has gained in the recent years.

Fiscal Policy

Fiscal policy refers to the means, by which the government adjusts its spending and tax rates to influence a countrys economy (Pettinger, 2011). It includes instruments like government expenditure and revenue. Taxation involves the collection of income by the government either directly or indirectly.

Revenue Collection

In the United Arab Emirates, oil is the primary source of revenue. Besides the plans to implement value added tax and corporate tax, the government is actively involved in selling bonds to the locals to channel their cash to the projects it considers more important (United Arab Emirates economic outlook, 2016). In the United Kingdom, processing and manufacturing industries contribute the greatest revenue, and macroeconomics policies have been enhanced to increase it. Efficient gains have been sought in education and health as well as the expansion of tax bases such as leveling of social security contributions and the income taxes between the employees and the self-employed (OECD, 2015). This difference in revenue collection has made the United Kingdom perform better than the UAE as the latter has not diversified its revenue income.

Government Expenditure

The government of the UAE is actively involved in an expansionary fiscal policy of growing the economy, and it sets desired economic goals of continued economic wellbeing as well as low unemployment while maintaining stable prices. It sells a significant amount bonds to the locals as well as foreigners to finance the implementation of its various economic strategies (United Arab Emirates economic outlook, 2016). It relies on the policy of increasing real GDP by raising the government spending on the important projects such as infrastructure and the aviation market. Once the investment turns profitable, the government pays back the debt. In a similar situation, in the United Kingdom, the golden rule is applied that states that over the full economic cycle, the government should borrow to invest for future needs only. The current requirements should only be met by the tax revenues collected (OECD, 2015). Contrary to the United Arab Emirates, the government of the United Kingdom relies on the sustainable investment rule and states explicitly that the government debt should be maintained at prudent levels.

Monetary Policies

Monetary policies are tools, including interest rates and inflation control, that the central bank uses to shape the economy of a country (Pettinger, 2011). In the time of inflation or deflation, the central bank may try to adjust interest rates to boost the domestic currency. The Central Bank also acts as the government adviser on economic issues.

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Inflation

Inflation is a state of the country's currency being weak and therefore, unable to compete with the major currencies effectively. The inflation rate in the United Kingdom declined from 2.6% in 2013 to 1.5% in 2014, while inflation in the UAE increased from 1.1% in 2013 to 2.3% in 2014 (Central Bank of the UAE, 2014). The moderate reduction of inflation in the United Kingdom was the result of job creation, in which unemployment level in 2014 was recorded at 6.2% from a previous high of 7.6% in 2013 (Central Bank of the UAE, 2014). On the other hand, the high inflation in the UAE was the result of the slump in the oil prices that had led to a reduction of revenue to the national government.

Interest Rate Determination

The Gulf Arab states Central Bank of the United Arab Emirates maintains the state's reserves of gold and foreign currencies as well as advises the government on financial and monetary issues. The Central Bank of the United Arab Emirates hiked its interest rates in December 2015 by 25 basis points as the result of a rise in interest rates by the Federal Reserve of the United States (United Arab Emirates economic outlook, 2016). At the same time, the United Kingdom has the monetary policy committee that sets monetary policies and that is independent in setting interest rates while the government of the United Arab Emirates has a hand in the setting of monetary policies by the Gulf Arab States bank. In both countries, the central banks should set the inflation rates while considering the governments set targets hence the states are slightly involved in setting the inflation rate. According to OECD (2015), the monetary policy on interest rates will be gradual and lower than 5%.

Comparing the Monetary and Fiscal Policies of the Two Countries

Both countries have had a general economic growth over the years, but they have also experienced some regression due to a different factor. UAE has experienced a downtrend in the economy since 2006 to 2010, and the policies put in place involved the diversification of revenue collection and the implementation of value added tax (Trading Economics, 2016a). The United Kingdom has experienced growth in the recent year despite the effect of Brexit as the result of the measure put early enough by the Bank of England to use structural reforms and Quantitative Easing since other monetary and fiscal policies like interest rates have been exhausted.

Conclusion

In summary, both monetary and financial policies are essential to an economy, and both countries have applied them in their systems. In the recent years, it is noted that the UAE had been hit economically mostly due to the slump in oil prices while the United Kingdom has experienced growth due to the diversification of the revenue collection. It has also managed to cut on the government expenditure as well as the creation of more employment opportunities.

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