Economics Essay Example | Topics and Well Written Essays - 1250 words

Economics - Essay Example In 2010 the government debt was at 1105.8 billion pounds, which was 76.1% of the GDP. Of that public sector net borrowing was 10.3 billion pounds in 2010 and the public sector net debt was at 58% of the total GDP (Economic Indicators, 2011). The growth predictions by IMF have been 1.75% in 2011 and the interest rates in 2011 have been at a record low at 0.5% (UK interest rate held at record low of 0.5%., 2011). The British Chancellor George Osborne has announced plans to reduce the government spending in public sector. Restrain will be enforced on government spending like benefits for the retired, higher education, flood defenses (Spending Review 2010: George Osborne wields the Axe., 2010). As part of the plan some surgery procedures will be restricted like cataract operation, some common orthopedic surgeries. Nursing homes for aged people will be closed and funds will be rationed for IVF procedure and obesity cures (Donnelly, L. ,2010). There will be other austerity measures like bu dget cuts for many facilities like libraries, trusts, theatres, counseling and advice centers on the country (Pubic Sector Cuts: Where will they Hit?, 2011). Prior to the budget the Chancellor had said that with this budget he wanted to take the country from a course of rescue to the course of reform. According to Cameroon the level of debt and the credit crunch are the main causes for the recession. So he preferred the strategy of monetary activities to control the recession. There was a tremendous opposition for the reduction in VAT by the Gordon Brown government, which led to a loss of revenue for the government facing a shortage of fund. On the contrary, the previous government relied on borrowing to increase government expenditure. According to them it would push the economy back on a path of growth. The Gordon Brown government strongly believed in adopting fiscal changes to tackle the recession. The key features announced by Gordon Brown were a 500 billion pound plan to save t he banks and 21 billion pound of tax cuts and increase in government expenditure (Sparrow, 2009). Gordon Brown reduced the VAT by 2.5% from 17.5% to boost the household consumption. This reduced 12.5 billion pounds of tax revenue from the treasury annually. The other cuts announced by the then Chancellor Alistair Darling included extending the 120 billion pound annual rebate for the people paying tax at basic rate. Increases in the excise duty for vehicles were delayed. To discourage the foreign companies from shifting their businesses abroad tax was exempted on foreign dividends. Billions of pounds were assigned to construct roads, schools and housing projects. All these policies were framed keeping in mind the Keynesian theory of Aggregate Demand. The Aggregate Demand is the total demand for goods and services in the economy. The right hand side of the following equation gives it. Y + T = C(Y-T) + G + I(r, (Y-T)) + (X – M) Where, Y = Real Income T= Tax C(Y – T) = Con sumption which is a function of real disposable income, i.e., difference between real Income and tax. G = Government Expenditure which Is Exogenous I = Investment which is a function of real disposable income and interest rate r = rate of interest which can be flexible (endogenous) or fixed (exogenous) X = Export Income M= Import Income Therefore, (X – M) = Balance of Payment. So if we consider the price level in the vertical axis and the national output in the horizontal axis and plot the aggregate demand curve, it will be downward