Economic Foundation for Public Policy: UK Fiscal Policy Analysis

This report analyzes the economic foundation of public policy, specifically focusing on the UK's expansionary fiscal policy implemented in 2009 during the great recession. The policy aimed to stimulate economic growth and maintain inflation below 2%. The report examines the policy's components...Read More

Running head: ECONOMIC FOUNDATION FOR PUBLIC POLICY
Economic Foundation for Public Policy
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a.
The paper considers expansionary fiscal policy taken by the UK government in 2009.
During this period, the country experienced great recession. The chief purpose of this policy
was to influence economic growth of the UK during recession. This further helped the
government to keep inflation rate below 2 percent (Degryse, Matthews and Zhao 2018). The
other important focus of this policy was to stabilise economic growth for overcoming the
boom phase of the economic cycle.
b.
Expansionary fiscal policy of the UK government considers tax reduction, increasing
expenditure of government and a budget deficit by large extend. Through adopting this
policy, the UK government intended to increase aggregate demand within the economy
during great depression. For doing this, the government increased government expenditure
and decreased value added tax (VAT). Tax reduction in turn influenced consumers to
increase demand, as they have more disposable income. However, lower tax rate increased
government borrowing in 2009. This happened because the government earned lower tax
revenue at that time. This significant amount of public borrowing influenced UK economy to
experience a stimulus within the depressed economy. However, the political condition of this
country experienced many disturbances during that period.
c.
Economic Output: According to Keynesian model, expansionary fiscal policy leads total
output of an economy to increase further. This happens, as the aggregate demand of the UK
increases keeping aggregate supply level as constant.
General Price level: Due to this policy, aggregate price level will also increase. During
recession, aggregate demand (AD) equates with aggregate supply (AS) below long-term

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aggregate supply curve. The entire situation can be described with the help of following
figure:
Figure 1: Expansionary fiscal policy
Source: (created by author)
According to above figure, real national income of the country has increased from Y1
to Y2 while aggregate price level has increased from P1 to P2.
Unemployment rates: Expansionary fiscal policy helps an economy to reduce
unemployment. Through increasing aggregate demand, the economy can create employment
opportunity.

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d.
Figure 2: GDP growth rate of the United Kingdom
Source: (Tradingeconomics.com. 2018)
According to figure 2, GDP growth of the UK decreased during the period of
financial crisis. However, after taking expansionary policy, this growth rate started to
increase after 2009.
Figure 3: Inflation rate in UK
Source: (Tradingeconomics.com. 2018)

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The above figure represents inflation rate of the UK. Inflation rate indicates change in
price level during recession. In 2009, price level decreased by significant amount. However,
after taking expansionary fiscal policy, price level increased by increasing rate.
Figure 4: Unemployment rate in the UK
Source: (Tradingeconomics.com. 2018)
e.
During recession, monetary policy tries to reduce the interest rate for influencing
expenditure and investment. This further decreases exchange rate and consequently improves
exports of the country. This happened in the UK during recession as well. Consequently, total
exports of this country increased significantly. In 2009, the government cut its interest rates
from 5 percent to 0.5 percent (Tradingeconomics.com. 2018). However, this decrease in
interest rate remained ineffective for restoring normal growth. Thus, the country experienced
a liquidity trap. Hence, form here it can be said the process of decreasing interest rates are
insufficient. In addition to this, during 2008-2009, the Bank of England used Quantitative
Easing (Raess and Pontusson, 2015). This is a part of monetary policy and considers
electronically money creation for buying assets like government bonds. The government also
experienced some limitations after adopting this policy except liquidity trap. Through
changing interest rate, the government cannot control various objectives within the economy.

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For instance, increase in oil price can cause cost-push inflation and this in turn reduces
growth of the country. Moreover, exports became comparatively less competitive.
f.
According to economic condition, the government takes fiscal policies accordingly.
However, to improve the condition, the government needs to gather exact information of the
country. To take exact and effective fiscal policy, the government needs to know accurate
information about the economy (Meinusch and Tillmann 2016). In addition to this, the
government requires to maintain borrowing costs. For this, the government can monitor the
entire scenario efficiently, as during expansionary fiscal policy bond price can be increased.
Thus, it can be beneficial for the government of the United Kingdom to adopt the policy
considering present economic condition irrespective of theoretical concept.

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References:
Tradingeconomics.com. 2018. United Kingdom Unemployment Rate | 1971-2018 | Data |
Chart | Calendar. [online] Available at:
https://tradingeconomics.com/united-kingdom/unemployment-rate [Accessed 31 Oct. 2018].
Degryse, H., Matthews, K. and Zhao, T., 2018. SMEs and access to bank credit: Evidence on
the regional propagation of the financial crisis in the UK. Journal of Financial Stability, 38,
pp.53-70.
Raess, D. and Pontusson, J., 2015. The politics of fiscal policy during economic downturns,
1981–2010. European Journal of Political Research, 54(1), pp.1-22.
Meinusch, A. and Tillmann, P., 2016. The macroeconomic impact of unconventional
monetary policy shocks. Journal of Macroeconomics, 47, pp.58-67.