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How might the increase in public expenditure over the last ten years be explained? Why might the government want to reduce real public expenditure?

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Introduction

How might the increase in public expenditure over the last ten years be explained? Why might the government want to reduce real public expenditure? How might the increase in public expenditure over the last ten years be explained? Why might the government want to reduce real public expenditure? Contrast the macroeconomic effects of a reduction in defence expenditure with those of a reduction in state pensions. An increase in public expenditure Every year the government spends billions of pounds providing a wide range of public services such as social security and the NHS. Typically, the government will spend around �300 billion each year, so for the government to spend this huge amount there must be some very good reasons. Over the course of the past ten years, the amount that the government has spent annually has risen sharply. This increase in spending has lead to budgetary problems for the government, who must either take the unpopular step of raising taxes, cutting spending in areas which are considered to less important than the areas in which spending has increased greatly, or having to increase the PSBR. During the first section of this essay, I intend to discuss some of the factors which could have resulted in an increase in government spending over the past ten years. In the early 1990s, Britain was experiencing its last recession. During this recession, the government had to spend a large amount of money. Much of this money was spent on paying social security benefits to those who had been made unemployed as a result of the recession. ...read more.

Middle

An increase in investment will increase aggregate demand, which could help to bring the economy out of a recession. The government may also forced to cut their spending because they cannot afford to maintain their current level of spending and because they cannot afford to borrow the extra money required. A situation like this could take place during a recession, when tax revenue is greatly reduced due to the increased number of unemployed people. Ideally, however, during a recession, the government would want to increase spending to try and increase aggregate demand and help bring the economy out of the recession. However, for the government to maintain a high level of spending, they will have to borrow a large amount of money. In order to encourage people to buy bonds, the government will have to offer high interest rates. However, because high interest rates encourage saving, investment will fall, which will reduce aggregate demand, which is the opposite of what the government is trying to achieve. Also, the government may want to cut spending on a item which is no longer required, or which has greatly reduced demand. Conversely, the government may wish to reduce spending on a service which is costing them too much money. For example, various governments have made cutbacks on the services provided by the NHS, like dental care and eye care. These cutbacks were made because the NHS was costing a great deal of money, and the government could not afford to maintain its level of spending on the NHS. ...read more.

Conclusion

However, a reduction in spending on defence would have similar effects as a reduction in spending on pensions. A reduction in spending on both items would tend to have a downward multiplier effect. The mechanism that results from a reduction in pensions is detailed above, and a reduction in defence spending would work in the same way. If defence spending is cut, the servicemen that make up the army will either be made unemployed, or will have a reduction in their real income. This will result in shops in the vicinity of military barracks having reduced demand, which could result in unemployment and increased government spending on benefits to the unemployed. The shopkeepers and staff made unemployment would then have less income, so the shops that they would have shopped in could be forced to close so because of reduced demand. This cycle could be repeated continuously. However, because the number of military personnel is much smaller than the number of pensioners, the effects of a reduction in government spending are likely to be much smaller. Even when the effects on the workforce of the various manufactures involved in the military industry, such as British Aerospace and Marconi, are taken into account, the downwards multiplier effect is likely to be much smaller than the effects of a reduction in spending on pensions. Like a cut in pension spending, a decrease in government spending on defence is likely to be counter-inflationary, although because fewer people are effected by it, the policy is likely to be less effective at countering inflation than cutting spending on pensions. However, the effectiveness cannot really be judged without knowing how large the cut was going to be. ...read more.

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