Future Economists Essay Competition: Commended B

About the author: James Douglas was commended in the Future Economists Essay Competition 2024.

James answered Question 2: The International Monetary Fund (IMF) estimated that global inflation increased to 8.8% in 2022, driven by rising food and energy prices. What does economic theory tell us about what actions and initiatives the Government of Jersey might introduce to deal with the consequences of high inflation and cost of living?

Future Economists Essay Competition 2024: Commended

Economics provides the framework to understand the dynamics of inflation, a significant challenge to government. Economics also provides solutions in the form of actions and initiatives that the government of Jersey could introduce which addresses the soaring inflation and rising living costs; the IMF has measured a rise 8.8% in 2022.

The government could explore fiscal policy measures to counteract the effects of inflation. Fiscal policies adjust government spending and taxation, for example, cutting public spending and increasing direct taxes which reduce overall demand in the economy. Public spending has been very high and inefficient as seen by the government spending £150 million over the last 5 years on consultants. This has been a contributing factor to demand pull inflation, as experts suggest spending has been irrationally very high. The government has tried to form plans with the full utilisation of Fort Regent as well as the new hospital location, a decision which still not been finalised. This government spending could have been used to try reduce inflation, but has instead been allocated in a way which has caused rising aggregate demand. In addition, we see that Jersey has a flat tax rate of 20% which restricts the government from receiving larger amounts of tax revenue from higher earners. The results of this regressive tax system are evident as higher earners have higher amounts of disposable income meaning that these higher earners consume more. This has also led to worsening inequality as those on lower incomes lose the 20% however, with the present demand pull and cost push inflation, it has a bigger impact on those on lower incomes. Therefore, a bigger proportion of their income is taxed compared to those higher incomes. So, implementing a progressive tax rate could reduce this rise in price level. Furthermore, it will bridge the inequality gap due to lower incomes having more disposable income. However, it is crucial to strike a balance between addressing inflation and avoiding excessive contraction that could lead to economic downturns and a possible recession. This could occur due to higher earners moving elsewhere due to the varying tax systems which would benefit them, such as Ireland. This could be vital for Jersey as it may lead to entrepreneurs or business owners emigrating, which could lead to employment opportunities within Jersey decreasing, causing a major fall in aggregate demand which could cause a recession.

Supply-side policies can also be utilised to address the specific drivers of inflation, such as rising food and energy prices. For instance, the government could focus on initiatives to increase agricultural productivity, promote sustainable energy sources, and invest in research and development to enhance resource efficiency. Jersey imports 95% of its electrical needs, despite the island having lots of untapped self-sustaining potential as an energy source. They could use this by having wind turbines or using tidal energy. This would be a great source of energy as it is sustainable, and Jersey faces up to 40 km/h winds, also utilising Jersey’s third biggest tidal range in the world. This would mean Jersey would no longer have to rely on importing energy. This is vital with their being inflating energy prices. Furthermore, we could create incentives to learn how to produce your own food as Jersey has a limit range of foods; like potatoes and dairy products. This could be done through information provision. Such as having educational courses on how to do it at home and have a bottom-up approach fixing this issue of inflating cost of living. Or the government could try incentivising the growth of small food supplier so that they can increase supply. This could be done through subsidising these firms so they have more funds to spend on investment on capital or infrastructure which will enable them to increase supply. This will mean we no longer have to import from the UK or France and decreasing the high inflation rates on foods which was up to 5.9% in 2023. Jersey must address this as we also face transportation costs on top of the prices of inflating food prices. This is increasingly important as transport costs are climbing due to rising gasoline price, as transportation costs have risen by 40% over the past five years in 2023. By addressing the root causes, Jersey can create a more resilient and stable economic environment, meaning that not all companies will be negatively affected by this cost push inflation.

Furthermore, wage and price controls are tools that governments historically have used to manage inflation. However, these measures are often controversial and can have unintended consequences, such as creating shortages or reducing the incentive for businesses to operate efficiently. This could include maximum prices so that wages do not rise any higher than the current rates. This could be done on foods which is a rising problem in Jersey whereby daily cost of living is rising. This has led to the worsening of living standards raising poverty rates on island, alternatively these people could resort to leaving the island to find elsewhere to settle down with greater quality of life. This could have negative impacts upon the island due to it causing cost push inflation. This is due to reducing supply of labour leading to wages rising further, which is then pushed onto the consumers leading to further inflation. This negative cycle is leading to many leaving the island because of these rising day to day costs.

In conclusion, economic theory provides a multifaceted approach for the Government of Jersey to tackle the consequences of high inflation and the rising cost of living. Implementing a combination of fiscal, supply-side policies, effective communication, and long-term structural reforms, can help mitigate the impact of inflation and pave the way for a more stable and prosperous economic future.

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