Much has been said over the last few years on the UK's budgetary position. The economy has been deepening itself into a deficit - which is when Government spending is greater than Government receipts (mainly taxes).
The word deficit brings negative connotations, and it definitely does. But it also brings positive impacts on the economy, as I will now explain.
A budget deficit means high or progressively increasing levels of Government spending. Government spending is a component of Aggregate Demand - the total planned expenditure in an economy over a given time period. An increase in Government spending will lead to an increase in Aggregate demand, and through using a basic macroeconomic model, this will bring increased national incomes, outputs of goods and services and higher levels of employment.
All this leads to economic growth which is very positive for the UK economy. This increase in aggregate demand (AD) as a result of an increase in government spending can be shown on the following aggregate demand/supply curve:
As the above diagram shows, economic growth occurs if AD increases from Y1-Y2. However, this also brings inflation - a sustained increase in the general price level in an economy, shown by the increased from P1-P2 on the above diagram.
Initially, when AD increases, the increase in economic growth is proportionately larger than the increase in the level of inflation. But, the major problems with a budget deficit mainly occur in the long term. This is because there will be a point where the economy cannot grow any more (shown on any point on the vertical AS curve above) because all the factors of production and available resources are being employed.
So, if AD continues to increase after the economy has reached its productive capacity, then inflation will increase proportionately more than economic growth, and eventually it will be solely inflation which occurs.
This method of spending your way out of a recession has been adopted by Labour over recent years, and is very much, in my opinion anyway, a short term vs long term argument.
In the short term, a budget deficit brings mainly positive effects on the economy as reflation exceeds inflation. But, in the long run, without increasing the productive capacity of the economy, inflation will exceed reflation, and bring neagative impacts on the economy.
Looking at this from a political view, it is the Labour party who, as mentioned above, have adopted the view to spend the UK out of the recession. But since the Coalition government have come into power from 2010, the plan has been to save the UK out of the recession, by decreasing the deficit through increasing taxes and cutting spending in numerous areas.
In my opinion, I think that Labour got the UK into a huge mess through firstly leading the country into a recession, but also in the way they tried to get out of it. To continue spending seems a very shallow approach and one which seems to be narrowly focussed on the present issues, and not on the possible long term effects. Spending your way out of a recession is known as a fiscal stimulus and I think that the Coalition government's plan of fiscal austerity (saving your way out of a recession) is not only the sustainable option, but it is now the only option after the mistakes and actions of the failed Labour Government.
I am, however, not completely supporting the Conservative and Coalition plan of action, as I think some areas of planned spending cuts are very precarious. But, the deficit is decreasing (by around 25% so far) and for that I think the Coalition should be commended to a degree.
In conclusion, I think that in many ways, it is almost an impossible task for government's to stimulate economic growth whilst keeping the level of inflation at a controllable rate, and preventing periods of recession whilst still maintaining the public' vote when it comes to a general election. Politics and economics interlink in many ways, but I think that when it comes to the UK's budget, the government cannot and will never be able to please everyone. For an example of this you only need to look as far as the current Coalition, where the cuts in Government spending are resulting in many displeased members of the British public and many who will give a protest vote to a party such as UKIP to show their frustrations.
No comments:
Post a Comment