Fiscal Policy, Put Simply

Economics terms are thrown about by those in-the-know all too regularly. Frankly, its baffling for those of us without expert knowledge in the subject, and “put simply” explanations are infrequent to say the least. #LetsTalkPolitics and challenge this.

The government, and even more specifically the Bank of England have a variety of techniques to deliberately affect the UK economy and its subsequent activity. The three main techniques used are Monetary policy, Fiscal Policy and Supply side policy, each having different impacts as well as different durations of effect over time.

Fiscal policy is essentially the alteration of government spending and taxation to achieve economic objectives such as an increased employment rate, less inflationary pressures and more consumer spending. The adjustment of both taxes and government spending directly affects us, as consumers, and aggregate demand (Total demand for goods and services within an economy).

There are two main types of Fiscal policy, expansionary and contractionary. Expansionary can be defined as an increase in government spending and a decrease in taxes to facilitate growth in the economy. Essentially the bank of England injects extra spending into the macro-economy. This can be in areas such as education or infrastructure to increase productivity, as well as instigating a multiplier effect, which boosts consumer activity. Along with this the government will decrease certain taxes such as VAT’s (taxes on goods such as cars) or personal taxes like income tax. This in turn increases the amount of disposable income us as consumers have, and in the long run can boost total economic growth.

Contractionary fiscal policy is of course, the opposite. Contractionary is a decrease in government spending and an increase in taxes. This policy can occur in occasions when there may be unsustainable growth in an economy, leading to an array of negative effects like demand-pull inflation.

There are of course a few negative issues with this policy. If the government were to be implementing expansionary fiscal policy, is it sustainable for our already large national debt? – In all regards, it isn’t. The UK’s national debt is persistent, and a large percentage of our GDP. At the time of writing this article it was a staggering £1,785,738,511,688.

Brexit has only added to the problem, in the near future we’re likely to see an increase in unemployment and depleted economic growth in the short-term due to leaving the EU market. This may lead to the need for expansionary fiscal policy, will this be sustainable for the UK in the long run? It’ll be interesting to see.

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