c.) Using the data and your economic knowledge, evaluate the contribution that the growth of government expenditure may make to the U.K. economic performance.
Government expenditure has a major influence on the U.K.’s economic performance, however, it has to be recognised that it isn’t the only factor affecting the U.K’s economic performance. Government expenditure can also be seen as current expenditure, capital investment and as transfer payments, e.g. unemployment benefits. Government spending is mainly financed through the means of taxation and government borrowing.
To evaluate the contribution the growth of government expenditure may make to the U.K. economy, it would be necessary to assess the government’s macroeconomic objectives: Sustainable economic growth, 2% - ‘plus/minus 1%’ inflation, low and stable unemployment and a healthy balance of payments. For example, if there is a sharp increase in unemployment in the U.K. the government would be forced to pay out more through unemployment benefits and other things such as subsidies for businesses etc, therefore increasing government expenditure, as they attempt to stabilise the U.K. economy.
Government spending can have a significant effect on the government’s macroeconomic objectives. Economic growth can be affected both in the short and long run by aggregate demand, which includes government expenditure. Short-run economic growth is determined by aggregate demand, therefore if one of the components of AD was to increase, e.g. government expenditure, it is expected that this would stimulate short term economic growth, as shown in ‘figure 1’ – as AD rises from AD1 to AD2, real national output should rise from Y1 to Y2.