Page 22 - Griffenomics

GRIFFENOMICS ISSUE 1
22
UK AUSTERITY
FACT: UK’S NATIONAL DEBT IS INCREASING AT AROUND 2.3 BILLION POUNDS PER WEEK DUE TO UK’S BUDGET DEFICIT
During the post-war period,
Keynesianism was the most
prominent economic movement.
Keynesianism is built on the ideas of
JohnMaynardKeynes, who recommend-
ed that governments could increase gov-
ernment spending to reduce mass unem-
ployment in the economy and suggested
the Keynesian model of macroeconom-
ics. However, since the 1970s, Thatch-
erism in the UK and Reaganism in the
USAwere very diƒerent from the ideas of
Keynes, they were adaptations of neolib-
eralism, which was a theory stressing the
e¢ciency of the private sector relative
to the ine¢ciency of the public sector.
Therefore, neoliberalism sought to di-
minish the role of the government in the
economy and introduced policies such
as privatisation of the public sector, en-
couragement of international free trade,
reduction of taxation, and deregulation
in the market. Blairism did not deviate
much from the core values of neoliber-
alism and the Labour Party led by Tony
Blair and Gordon Brown accepted the
need for a free market with relatively lit-
tle government intervention to an extent.
Unfortunately, the global financial
crisis of 2008 and the global recession
that followed have brought an end to
this economic consensus. A recession is
a time period of two or more consecutive
quarters of negative economic growth.
Since then, the two major parties in the
UK now propose diƒerent plans to tackle
the problems that have emerged for the
UK economy due to the credit crunch.
A depression is a long period of neg-
ative economic growth from which it is
very di¢cult to recover. In order to pre-
vent the economy from sinking into this
more severe state of economic recession,
the Labour government under Gordon
Brown adopted a Keynesian-style refla-
tion of the economy. An example of refla-
tionary policy is where the government
reduces taxation and increases govern-
ment spending to boost overall economic
activity and hence bring the economy out
of recession. In theory, this type of ex-
pansionary fiscal policy (use of taxation
and government expenditure to achieve
the government’s macroeconomic objec-
tives) should increase economic growth
by decreasing taxation, thus allowing
individuals and firms to have more dis-
posable income, which is the amount of
individual income or corporate revenue
retained after taxation. This increase
in disposable income should cause Ag-
gregate Demand to increase, bringing
about short term economic growth. This
is because consumers are likely to spend
more if they have more disposable in-
come due to the decrease in income tax.
Furthermore, firms are likely to spend
more of their profits on investment due
to the decrease in corporation tax.
Aggregate Demand (AD) is the to-
tal amount of spending on goods and
services in an economy over a period of
time. It consists of consumption, invest-
ment, government expenditure and the
balance of payments (exports - imports).
The growing AD will lead to lower unem-
ployment as more workers are needed to
satisfy the growing demand for goods and
services. This also highlights the idea of
derived demand, which is where the de-
mand for one good or service is caused by
the demand for another good or service.
For instance, the demand for labour is
derived from the demand for goods and
services in an economy because labour is
used in the provision of these goods and
services. While Brown’s reflationary pol-
icy—based on Keynes’ famous idea that
governments can spend their way out of
a recession—worked to a certain extent,
it caused a huge budget deficit for the UK
government, which is the diƒerence be-
tween the government’s annual taxation
revenue and their spending.
Both the coalition government and
the Labour Party have placed great em-
phasis on reducing the budget deficit,
and here lies the greatest divergence of
economic policy between the two par-
ties. While both parties agree that the
UK’s budget deficit needs to be substan-
tially reduced if not eliminated, they fun-
damentally disagree on the speed with
which this should occur as well as the
UK AUSTERITY
Deficit reduction for growth or growth for deficit reduction?
THE RED BOX George Osbourne poses with his signature briefcase
Photo courtesy of Helen Cobain Photo by The Press Association