Macroeconomics Policies

Macroeconomics Policies 1

MACROECONOMICS POLICIES

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Macroeconomics Policies 2

The process of writing a budget is one that needs patient on both the part of politicians

and citizens alike. Budget writing comes with a lot of responsibility as several factors ranging

from economical to political issues are considered. The success of an economy lies mostly in its

budget. Budgeting takes into consideration all government spending be it on capital or public

expenditure. In it are government objectives and plans for any fiscal year. It determines the pace

at which an economy will grow. Consequently, politicians depend mostly on the success of a

budget to increase their chances of being re-elected into office. For this reason, any budget

drawn for any fiscal year should aim at improving the levels of employment, reducing inflation,

increasing government expenditure on both capital and public goods, and reducing taxation. For

this reason, election outcomes will be positively affected by the rate of GDP increase due to

increased productivity.

Question One

However much challenging the budgeting process is, the forthcoming budget will ensure

that government spending in all sectors of the economy will be to the satisfaction of consumers.

Studies have shown that a large percentage of voters often punish politicians who create deficits

in the economy by not re-electing them into office. For this reason, the budget to be drawn will

focus on economic growth while at the same time giving consumers a reason to re-elect

politicians into office. For any incumbent to attract votes and have election outcomes in his or

her favour, he or she has to provide achievable expenditure. Therefore, the budget will be drawn

to attract particular voters. Swing voters will, hence, vote into office those incumbents who will

provide feasible spending (Klomp & Haan, 2013, p. 248).

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The forthcoming budget will aim at increasing the current Gross Domestic Product and

economic growth of the nation. It will, however, focus more on public expenditure than on

capital expenditure towards the election period. This strategy will convince eligible voters to re-

elect incumbents as government spending will focus more on the benefits of the public (Klomp

& Haan, 2013, p. 249). In addition to this, the budget will employ financial plan policies in the

year before election to increase probability of re-election. The fiscal development will fuel

growth of the economy. Therefore, constituents will infer the increased growth in the economy

as a sign that the politician in office is reliable and able. Chances of re-election will, thus,

increase for any incumbent.

In the last years, it has been noted that voters often prefer lower taxes and high

government spending (Klomp & Haan, 2013, p. 250). They, therefore, reward any politician who

will deliver these. For this reason, the upcoming budget will ensure that its expenditures are on

lower tax revenues and higher public spending by the government. Furthermore, economic

growth helps in re-election, and since economic policies affect economic outcomes, good results

are taken as an indication that the incumbent is competent enough to run a country. Therefore, all

expansionary fiscal policies of the budget will aim at improving the economy's GDP,

unemployment and reducing any probable signs of inflation. Voters will, therefore, be satisfied

with the government enough to re-elect incumbents into office.

Question Two

Basing on the current UK unemployment rate of 4.3%, national income will be at 17.31

million pounds that is in contrary to the economic forecast of 20 million pounds if the country

were to achieve full employment. Therefore the level of output that will be produced will be so

Macroeconomics Policies 4

small that there will be unemployment in the country. According to Arthur Okun, the founder of

Okun’s law, short-run rising unemployment rates has a negative correlation with slowdowns in

GDP growth (Loungani, Jalles, & Ball, 2015, p. 178). The law shows a statistical relationship

between real output and unemployment in an economy. The law which is expressed as

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



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

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  

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indicates how unemployment rates vary with output growth.

Y* is the potential output of an economy at full employment. In this case, the treasury

forecasted the country's GDP at 20 million pounds if it were to achieve full employment. The

connection that output and unemployment has, also known as the different version of Okun's law

can be used to calculate a change in the rate of unemployment. It indicates how varying

unemployment rate is moved with quarterly real growth in output and is denoted as; change in

the unemployment rate = a + b* (Real Output Growth) where b* is the coefficient of Okun

(Loungani, Jalles, & Ball, 2015, p. 180).

When the total amount of output produced in an economy declines, the number of

revenues realized by producers will decrease. Reduced marginal revenues will mean that firms

will not afford to pay all of their workers and thus will lay-off some of them. As more and more

workers are suspended, output will gradually reduce and so does the purchasing power of

consumers due to reduced income. As this cycle continues, the rate of unemployment continues

to rise. The economy will thus experience slow growth meaning the government will eventually

have to step in to correct this situation to bring back the economy at equilibrium.

Question Three

Macroeconomics Policies 5

Policies set by the government often affect employment outcomes. Investors and

producers, on the other hand, rely on these policies when making big investment decisions. The

labour market is a crucial factor that determines the level of output that producers can produce to

satisfy consumer market. Low production rates often lead to lower marginal revenues realized by

investors and producers’ alike leading to lower wage rates and finally low labour supply. All this

combined often leads to cases of unemployment.

According to Ferreira (2018), unemployment rates in the UK are growing at an alarming

rate with recent statistics placing it at 4.3 percent. ONS (Office for National Statistics) stated that

average earnings increased by 2.5 percent including bonuses but were lagging behind inflation as

a result of expounding job vacancies.

The UK government currently is paying over 30 billion pounds a year on its national

budget (Ferreira, 2018). The result is increased interest rates that will hike the amount that the

government will reimburse as interest payments. Taxes are therefore increased to counteract this

situation thereby leading to reduce consumer spending. Furthermore, higher rates of interest

reduce the rate of UK's economic growth. This will finally result in low investment, decreased

consumer spending, low output and finally increased rates of unemployment as firms lay-off

workers.

The government, therefore, has to adopt a policy that will aim at reducing current

unemployment. This will help in reducing poverty cases by availing incomes to those in the job

bracket by increasing their levels of consumption. Although policies that can generate and thus

maintain full employment in a nation have rarely been tried, it is imperative that the government

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adopts tax and expenditure measures that focus on policies that will increase labour demand and

supply in the short run and over the medium term respectively.

According to the Keynesian model, for the country to achieve full employment, the

government has to adopt a financial plan policy by either rising government spending or

lowering taxes (Ebrary.net 2014-2018). In case the government decides to increase its spending

and lower its taxes, the total amount of expenditure in the economy will expand. Consumers will,

therefore, spend more on goods and services while firms will find a justification for increasing

their production. The overall outcome of this situation is that more jobs will be created in the

process thereby resulting in decreased unemployment rates and finally attainment of full

employment.

Using knowledge gained from the multiplier, we will determine the necessary amount of

government spending needed for full attainment of employment in the UK. By using the current

unemployment rate of 4.3 percent and the forecast total employment GDP for the next fiscal year

of 20 million pounds, it is found that the next fiscal year real GDP for the UK will be 19.14

million pounds. By taking into account a hypothetical multiplier of 4, it is found that in every

pound that the government will be spending, an additional 4 pounds will increase in total

expenditure and equilibrium output. If the administration then increases the current GDP by 8

million pounds, then the government must increase its spending by 2 million pounds. This will

thus permit the nation to achieve full employment.

In case full employment is to be obtained by reducing taxes, consumers will have more

income at their disposal (Ebrary.net 2014-2018). They will, therefore, increase their levels of

consumption spending from 1 million pounds and use more than three-quarter of their disposable

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incomes in purchasing goods and services. As households increase their demand for products and

services, producers will increase their production of goods and services thereby creating

additional jobs. Consumers will however not spend all of their disposable income but will save

some. By using a hypothetical MPC of 0.75, it is determined that the amount of taxes that the

government should reduce for consumers to spend an additional 2 million pounds. From this, it is

noted that taxes would have to be cut by 2.7 million pounds (0.75 *2.7 million pounds =2 million

pounds).

Question four

According to the economic forecast for the next fiscal year, the amount of revenue to be

collected through taxation will be lower than direct expenditure on both public and capital goods

by the government. A budget deficit will exist if the situation is not corrected. The situation is as

follows;

GDP -19.14 million pounds

Imports 20 percent of GDP and exports 2million pounds

Tax is 20 percent of national income

National Income= GDP + (exports-imports)

Imports = 20% *19.14 million pounds= 3.8 million pounds

National income= 19.14 + (2-3.8) = 17.31 million pounds

20% *17.31 million pounds = 2 million pounds = revenue collected from taxation.

Macroeconomics Policies 8

From this, it is found that there exists a budget deficit of 2 million pounds between

government expenditure and revenues collected from taxation. The government, therefore, has to

choose an option that will cause a smaller increase in this deficit. UK's administration will have

to increase its expenditure on both capital and public goods, which will be followed by a slight

increase in taxes. As output increases, producers will increase their production while consumers

increase their consumption.

However, it is not advisable to reduce taxes as this will have to be followed by reducing

government spending as well. Tax cuts will result in higher government budget shortfalls that

will reduce public savings and eventually raise interest rates. Furthermore, investing in tax cuts

by reducing government spending will reduce output and increase federal borrowing. This will

adversely affect the economy as it will reduce long-term economic growth.

Question five

On looking at the economic forecast for the next fiscal year, it is inevitable that the

number of imports will exceed exports. This will create a balance of payment deficit in the

economy as the amount of capital the government will be spending on purchasing commodities

from outside will be higher than the amount gained from exporting its output (Thirwall, 2011).

With the current aim of the government of creating full employment in the economy, it is crucial

that this situation should be avoided as this will result in reduced spending by the government

thereby decreasing employment rates.

For the full employment objective to be attained without running the government into a

balance of payment deficit, the value of the sterling pound has to be lowered against those of

UK’s international trading partners. This will reduce cases in which international trade partners

Macroeconomics Policies 9

buy the sterling pound to keep it above their currencies (Thirwall, 2011). Furthermore, to avoid a

balance of payment deficits at full employment, the country will have to negotiate with its

international trade partners to raise the value of their currencies against the pound. To achieve

this, UK has to give up demands such as enforcing copyrights and patents.

The UK national budget plays a very crucial role in determining the growth rate of an

economy. Within it lie all government expenditure programs for any fiscal year. All these

programs will determine not only the success of UK's politics but the economy as well. The

government, therefore, has to ensure that the country can offer adequate employment

opportunities for it citizens. Reducing unemployment in the country will be determined by UK's

policies which will influence the country's output and consumption levels. Therefore, when

drawing out the national budget, all considerations should be put in place to ensure that the

country will be at its maximum production levels to avoid unemployment and other related

issues.

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References

Bernstein, J., & Baker, D. (2014). Full Employment and the Path to Shared Prosperity. Center for

Economic and Policy Research.

Ebrary.net 2014-2018. (n.d.). Fiscal Policy to Achieve Full Employment. Retrieved from Ebrary:

https://ebrary.net/15074/economics/fiscal-policy-to-achieve-full-employment

Ferreira, J. (2018, 3 21). United Kingdom Unemployment Rate. Retrieved 4 13, 2018, from Trading

Economics: https://tradingeconomics.com/united-kingdom/unemployment-rate

Klomp, J., & Haan, D. J. (2013, October). Political bugdet Cycles and Election Outcomes. Public Choice,

157(1-2), 245-267.

Loungani, P., Jalles, T. J., & Ball, L. (2015, January- march). Do forecasters believe in Okun’s Law? An

assessment of unemployment and output forecasts. International Journal of Forecasting, volume

31(i), 176-184.

Thirwall, P. A. (2011). Balance of Payments Constrained Growth Models: History and Overview. Springer

Links, 64, 307-351.

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