Macroeconomics – Fiscal Policy.
Example : 1
Level - IGCSE
Case Study - The data below shows the UK Government Spending in the year 2020-21 and 2021-22.
| Functions | 2019-20 | 2020-21 |
|---|---|---|
| General public services | 83.6 | 71.7 |
| Defence | 44.6 | 44.6 |
| Public order and safety | 36.5 | 39.1 |
| Economic affairs | 70.4 | 196.4 |
| Environment protection | 12.5 | 13.0 |
| Housing and community amenities | 15.0 | 13.6 |
| Health | 173.4 | 218.6 |
| Recreation, culture and religion | 12.6 | 13.0 |
| Education | 95.7 | 95.6 |
| Social protection | 291.4 | 299.6 |
(Source : https://www.gov.uk/government/statistics/public-spending-statistics-release-november-2022/public-spending-statistics-november-2022)
Assess how the economic growth of UK could be affected by the change in Government spending.
Possible answer:
Well! Before we get into the assessment let us first define the economic growth. Economic growth is the increase in the rate at which an economy produces output within a span of 12 months. It is measured in terms of percentage.
Government spending is one of the tools that a government might like to use to influence the economic growth in the economy. Using Government spending or tax or both to influence the economic growth is known as fiscal policy.
From the data above we can see that the UK government has decreased the government spending from £999.6 bn in 2020-21 to £955.8 bn in 2021-22. They must have done that to control the economic growth as excess growth might cause rise in inflation in the economy.
Oppositely, if the UK economy experiences low economic growth then the UK government might want to increase the government spending. This is due to an increase in government spending in the form of developing infrastructure such as building more roads, subways, airports and seaports might avail many contracts for domestic businesses. Businesses having contracts from Government would like to invest and employ people to complete their contracts.
This will cause a thrust in the economy leading to more employments in other sectors which in turn will help to increase the income among people at aggregate level. Higher income at aggregate level will fuel the demand in the economy leading to increase in aggregate demand in the economy. As aggregate demand goes higher leading to increase in price level, which in turn motivate sellers to increase their quantity supplied at the aggregate level. This will result in production of more output leading to increase in economic growth.
However, increase in government spending leading to increase in income may make people to afford to buy the imported goods. If the trend goes higher then, the increase in income led by government spending may not support the increase in output in the economy leading less benefits achieved from the government spending. It is also possible that people may save money when they earn more. If the tendency among people to save more, then, again the economy may not benefit from the government spending. One more issue can be addressed here that, if a government decides to spend more than their expected revenue then it may fall into national debt which will cause slowdown in the future economic growth.
Besides, national debt might cause a huge cut-down in necessary spending on healthcare or education as the large amount of government revenues could be used to pay back the interest on the debt. This would cause the opportunity cost of the interest payment to be very high as it may affect the productive potential of an economy in the future.
Due to these above mention issues sometimes governments are reluctant to increase their spending as it can be seen from the data above as UK government found to decrease the government spending of around £43.8 bn compare to 2020-21.
Example : 2
Level - IGCSE
Case Study - The data below shows the UK Indirect Tax rates from 1980-2016
 |
| Indirect Tax |
Examine whether indirect tax has got more benefits than costs.
Possible answer –
Before we get into the evaluation of the indirect tax, let us first know what is indirect tax? Indirect tax is the tax that is charged on expenditure and paid by the buyers indirectly. As it is charged on purchases, so the choice to pay the taxes depends on the buyers.
In UK, there are 11 types of indirect taxes (1) including VAT and council tax. From the chart above, we can see that the indirect tax in UK has increased from 15% in 1980 to 20% in 2016.
There must have some advantages and disadvantages of indirect taxes. Let, know those one by one.
The advantages are as follows; 1> it is one of the sources of government revenues that UK government may use to provide various necessary public services in the economy. This will make the lives of millions convenient. 2> indirect taxes may help to decrease the consumptions of demerit goods that are not beneficial for the society. 3> it can also be helpful to overcome the negative externality problems that occur due to the over consumption and production of a good in the economy.
The disadvantages are as follows; 1> indirect taxes cause burden on buyers and sellers as it causes the price to go higher. This may cause lower demand leading to increase in unemployment of resources if not directed well. 2> indirect tax may be regressive as poor and rich both may pay the same size of tax, if they purchase the same good. This is unfair to the poor households. 3> if taxes are imposed on necessary goods and services then it may affect the consumption of the poor households leading to decrease in their living standards.
Though there are many advantages, but the impact of the disadvantages cannot be ignored as it may affect the living standards of the poor households directly if the government of the day does not take any required actions to solve the problems. Overall, it seems the disadvantages of the indirect taxes to be greater as it would be affecting the households personally, whereas the advantages of the indirect taxes would affect them socially.
Source : (1) https://www.gov.uk/government/collections/vat-excise-duties-and-other-minor-industry-specific-duties-and-levies
0 Comments