Discuss the extent to which you agree with the following Statement: The Government must make significant cuts to generate future economic growth.

Government Spending is one of the components of Aggregate Demand, alongside consumer expenditure, investment and net exports. With any changes to any of these components, AD will either shift backwards or forwards, as if government spending increased it would cause AD to shift forward and with the multiplier effect it would increase AD more, increasing output and increasing the Real GDP, and so showing the economy growing.
However, a large increase in government spending causing a large multiplier may be bad for the economy, even though they would be operating at optimum output, it could mean that AD has increased too much and there is not enough or no potential growth, causing increases in inflation and making it harder for consumers to buy the same amount of goods without having wage increases, which means that governments would have to increase their spending again.
Government Spending comes from two main sources, tax revenue and lending, as the revenue earned from tax, the government use to fund the NHS, education services etc, which are good sources to put revenue into to cause actual and potential economic growth, tax revenue sometimes may not be enough amount of money; this is when the government would start lending money from central banks etc and this would be a budget deficit as government spending is greater than tax revenue.
A budget deficit can go into millions and billions of pounds and the current Uk deficit is £1 trillion pounds and increasing, this may show signs of less tax being received and could mean that there is not enough actual economic growth as there could be a higher rate of unemployment or businesses becoming bankrupt, and an increase in government spending could be signs of an economy trying to come out of a recession by stimulating actual economic growth.
So sometimes a budget deficit would be a good sign, as it may be increasing quality of education and health care services; which also causes potential economic growth, and producing more jobs for the labour force making the country more competitive with more efficient workers and potentially lowers inflation as well.

The graph shows the effect of government spending and the multiplier effect increasing AD, but also increasing the LRAS curve as well increasing the capacity of the economy which is good for the economy as its GDP is increasing and there is potential economic growth as well.

However, in a budget deficit, the government has to gain the revenue for its spending sprees, and that is done by the lending from central banks , this borrowed amount has to be paid back by the government with interest as well; this again increases the budget deficit.
The way the government could pay the debt back is by increasing VAT or other taxes to gain revenue, but they may still require extra money for their required areas e.g. healthcare etc, this means they may need to increases taxes to cover the lending debt and also fund for spending.
Another way the present government is trying to reduce the budget deficit is with austerity measures where they are cutting government spending in benefits, healthcare education etc.
cutting government spending can cause a negative movement of AD and also a negative multiplier effect retreating the AD curve even more, this could decrease Real GDP, unless there is a matched or greater increase in other components of AD, this shows that it could even cause a recession if it is continues for more than 2 quarters.
Another effect that an increasing budget deficit could be that it could affect the countries credit rating which for the UK is currently AAA, this means that it is safe for investors to invest in the country and can get their money back and more, which is a good thing as it means that the country has good resources of gaining the extra revenue and also the better the credit rating the lower the interest rate.
The credit rating can be lowered depending on how much and how long a budget deficit is increasing as it means that the economy is continuously falling short of revenue and is borrowing to pay debts back, which means that investors may not get their money back and so means that there could be less investors and higher interest rates.
For a country like Greece their credit rating has decreased all the way to ‘junk’ meaning that it is unsafe for investors to buy the debt, due to how large their budget deficit is.
Again this would cause rippling effects onto the economy as consumers would be effected as other solutions to gain revenue would be increasing even more and due to interest rates increasing (using a monetary policy to get investors to invest) it could meant that consumers would have less discretionary income, which causes further falls in GDP.

Since the 2008 recession the government has increased government spending to get out of the recession (automatic stabilisers e.g. less tax more benefits), in 5 years it has actually caused a decline of GDP, due lack of consumer and investment confidence in the economy, and the budget deficit doubling in size, a logical thing may be that cutting government spending and using austerity measures may be used to look to cut the deficit and the economy working in a cycle again.
On the other hand a country such as the USA, has dine the opposite and increased government spending to increase the output of the economy, which has shown unemployment decreasing and the economy growing, but also facing a decline in credit ratings, but really not having much effect of getting extra revenue, and even some countries such as Japan, which have a budget deficit of a 223% the size of their real GDP, does not face any decrease in any credit rating.

I believe that, whether the credit ratings change, the economy grows or not, depends on other issues as well such as the position of AD, natural disasters which cannot be taken account as bad decisions, but for a country such as the UK, austerity measures and a decline in government spending may be the best way to generate future economic growth, so more boom periods occur and due to some government spending may not be good anyway to increase potential growth as time lags may occur and what it was ‘invested’ into may not be required-low demand.

Savings

Why We Should Save

There are many ways and already, are many institutes/facilities which accommodate people’s needs to save and invest, but I am, a newly appointed minister in this time of economic need; I will encourage many workers to start saving and to help them save with my new schemes which I am purposing only to benefit every individual personally and also to help the economy to strengthen and re-gain its rightful status.

Some workers may be discouraged to save as much, especially in difficult economic times due to many regulations still appointed today but I would like to show the public what I purpose should happen.
One of these regulations would be the restrictions on job seekers allowance; which may not be paid to anyone who has £5000 savings and investment and so I believe that workers should be encouraged to save as much as they can, without having to worry about their illegibleness to job seekers allowance.
I think this should be done, by not taking into account the money workers have invested into companies and investment-bonds but I purpose that investors are not allowed dividence or cash prizes from the investment, during periods when workers are receiving job seekers allowance, but instead it should be taken by the government.
As well as that I would like to raise the maximum savings amount from £5000 to £7500 as it would encourage workers to save more without worrying, so they would be able to maintain a standard of living during unemployment.

I would like to introduce the above suggestion as soon as possible as I believe it would be beneficial for the economy as more workers would save more, and also invest allot more, and more importantly the increase of investment in companies would be away of increasing the Aggregate Demand and helping companies raising money without having to lend as much to produce more and meat demands.
This would require the government paying more JSA, but they would also be financed for most of it, as I have stated above: that they should receive investor’s dividence or cash prizes if they are on JSA.

Currently the government is still going along with previous pension schemes where national insurance contribution is deducted from each worker, and paid as state pension after retirement age.
Our population in the UK is ageing-meaning more pensioners in the future, and fewer workers with a low birth rate.
This trend shows fewer workers and more pensioners and so resulting in higher national insurance tax from each worker to gain the money to pay pensioners, normal state pension.
I propose that state pension should be abolished and so each worker has to make private contributions compulsory, and so anyone who starts work for the first time from August 2011 and so resulting in pensioners having their pension, whether they are in the Private or Public sector.
The rationale behind this is due to the emerging pension gap and so workers don’t have to worry about remembering to save because I also propose that the percentage of their wage is automatically taken out and paid into their individual pension account; I also believe that this whole procedure should be controlled by the government and not privately, eliminating the risk of collapsing, private systems.
My proposition is good for the economy as it will help the government to pay everyone their own pension, and it will not put off others from saving-thinking that their money will go to someone else but it will go to them.
As well as that it will keep up the funding old homes and also special benefits for the older generation and so there should not be a run out of money and the government should not need to refer to any loans to pay for pension resulting in zero chance deficits.

I think both of my propositions are well thought of and should be put into action as soon as possible, to strengthen and help the economy strife back to the boom, and save money and worry for workers.
Even though, I believe both propositions are unique and will be helpful, but only if one was allowed to go through I would choose the fact that Job seekers allowance should not be restricted at £5000 but increased to £7500 and not to take into account investments into government and firms, because I believe that it gives workers security and confidence to save, and invest into companies to help them and resultantly, helping the economy.

Unemployment

The Unemployment has increased dramatically since the 2008 recessions and is still increasing with redundancies due to higher costs and lower fundings.
Unemployment rate in Britain has increased to:
8.4% in December 2011
Unemployment
Unemployment is a key indicator for economic growth (actual and potential); it is when someone from the labour force is out of work and is actively seeking work.
Measuring unemployment is worked out as a percentage of how what percent of the labour force is unemployed, it is worked out by the unemployed divided by the total labour force, times one hundred.
Negative growth in Aggregate Demand, is actual growth declining (shifting back); this is when AD moves away from full capacity.

The graph on the left shows Aggregate Demand shifting backwards to Y2, increasing the output gap from the economy operating at full capacity; this is due to a decrease in the components of AD: C+I+G+(X-M).
Due to the economy not operating closer to full capacity, there is an increase is fiscal unemployment, unemployment in areas due to a lack of AD.
Fiscal Unemployment can arise during recessions as there is negative active growth in the economy and so firms are not making enough profits, due lack in consumer expenditure and confidence and so cannot afford to remain with as much employees, and so there is an increase in unemployment. However unemployment can rise accidentally by contraction-ary fiscal policy applied to the economy to reduce inflation, where government spending decrease and consumers pay more tax, so leaving them with less discretionary income to spend, but reduces inflation.
This policy reduces inflationary prices but on a Keynesian point of view, moves AD away from full capacity, meaning that there are areas of the economy not being used and so increases inflation.
This shows that when AD has a negative growth, there is always an increase in unemployment as the economy is not working closer to/at full capacity as it was before so fewer workers are required and so unemployment increases with actual negative growth.
On the other hand when there is a actual positive growth when AD increases and gets closer to full capacity, more of the economies resources are being used more efficiently and most of all the labour force are being used alongside resources and capital, which means that unemployment is decreasing with respect to how close AD is getting to full capacity.
Potential growth, is growth caused by a shift in the LRAS curve to the right, increasing full capacity and so has a different effects o the level of unemployment, according to the two main view points: Classical and Keynesian.
Classical Economists argue that we are always working at full capacity, so in terms of employment, we are currently employing as many workers as we can, due to the fact we are at full capacity and in the short run, when unemployment rates increase it is said that the market will clear.
This means that if Price levels have increased the SRAS on the graph will shift back to equilibrium, and relating this to unemployment, it means that wages will decrease, from the increased price level, so more workers are employed and the economy is working at full capacity again.




The graph shows a short run aggregate supply curve. The SRAS curve shows the price levels increased due to inflation and so it’s moved below full capacity, classical economists below that this only occurs in the short run and that the market will clear. This graph related to employment shows that the cost of labour cost has increased and that firms have to make workers redundant, so resources of the economy are not being used to the markets full capacity and for the market to clear, classical economists believe that wage costs will decrease and the SRAS curve will move back to full capacity position.
This means that in the long run the long run aggregate supply curve stays the same.

The graph on the right shows the Classical view on the Long Run Aggregate Supply Curve, it show the LRAS curve shifting to the right to LRAS2, this means that supply side policies have been used and increase full capacity.
As Classical Economists believe that the economy is working at full capacity, so when the potential labour force becomes the labour force and the unemployment rate decreases and there are more workers it means that full capacity increases and the labour force quantity and participation rate increases as well.

However a Keynesian Economist would believe that potential growth would increase full capacity same as the classical view, however Keynesians believe that the economy is that it can be between full capacity and below it, and if the economist is not operating at full capacity, there would be unemployment, and so supply side policies would increase full capacity would shift the LRAS curve out, so more unemployed can gain better training and go into high demanding occupations, but this also has high risks due to the time lag, and it may not have any effect on unemployment rates.
Potential growth however would be good for combating geographical and immobility of labour, especially with growing populations, full capacity has to increase to accommodate the larger labour force.

Cheaky Barclays

Barclays Bank has been 'ordered' to pay back half a billion pounds to the treasury, in tax which it tried to avoid.
No wonder we are in such a huge budget deficit.

Lloyds banking group

Part owned Lloyds banking group by the government, via our monry has announced that it has made an annual loss of £3.5 bn.
 The announcement cam days after bonuses for the bankers were canceled.

Eurozone

The Euro zone's economy is set to shrink, causing the the second recession in three years.
 A recession being two consecutive quarters having negative growth.

RBS

Royal Bank of Scotland, another bank largely owned by the government and taxpayers have recorded a loss of £2 billion for 2011. They have made a loss four years in a row since their bailout in 2008.