Fiscal Policy And Its Effect On Economic Growth

1932 WordsApr 3, 20158 Pages
Fiscal policy involves the use of government altering the levels of spending, taxation and borrowing to influence the pattern of economic activity and affect the level of growth of aggregate demand, output and employment. The main goal of fiscal policy is to stimulate economic growth, keep inflation low (target of 2%) and to stabilise economic growth. There are two types of fiscal policy. Expansionary is linked to increases in government spending to boost economic activity and contractionary which is linked to decreasing government spending to lower economic activity. The financial crisis of 2008-2009 uncovered an unstable and unbalanced model of economic growth in the UK, which was based on growing levels of public and private sector…show more content…
According to recent analysis from the International Monetary Fund (IMF), in 2010, the UK is estimated to have had the fourth highest level of structural government borrowing amongst the 29 advanced economies for which comparable data are accessible. This structural government borrowing is one of the main underlying issues that the Budget, over the reign of this current government, will try to address. However, at least according to plans published so far, the UK is intending the fourth largest fiscal consolidation among this same group of countries and so by 2017 the IMF predicts that the UK will have a lower level of structural borrowing than many other advanced economies, being below the average in the Euro area and below the average among the G20 and G7 countries. The UK coalition government started their fiscal consolidation (concentrates on reducing government deficits and debt accumulation, i.e. national debt) towards the end of 2010 when the Labour government’s fiscal stimulus package was abandoned. The first act by the newly appointed coalition government was to cut spending and to increase indirect taxes, which involved increasing the main rate of VAT from 17.5% to 20% from the beginning of 2011. However, increasing tax and reducing government spending have advantages and disadvantages. The government should cut spending because primarily there would be less crowding out in the economy.
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