UK Fiscal Policy
In the 1950, 60s and 70s the government was keen to use fiscal policy to fine tune the econom. It was felt that the government could ensure full employment by increasing AD when necessary. During this period it appeared that there was a trade off between unemployment and inflation as suggested by the Phillips curve.
However in the 1970s the economy experienced stagflation. This involves an increase in inflation and unemployment at the same time. This was seen to be evidence that fiscal policy was not effective in maintaining full employment and low inflation..
Current UK demand policy tends to concentrate on the use of Monetary policy. Monetary policy has a few advantages over fiscal policy
- It is easier to change the interest rate than levels of tax and spending.
Fiscal policy has more side effects e.g. work incentives and impact on government borrowing e.t.c
In 2009, the MPC cut interest rates to 0.5%. However, this dramatic cut in interest rates appeared ineffective in getting the economy out of a recession. It appeared the economy was in a liquidity trap. Therefore, the government also turned to fiscal policy to try to stimulate economic activity.
Government borrowing increased sharply due to falling tax revenues from the recession and attempts to increase Aggregate Demand (e.g. VAT cut to 15%)
Essays and Revision Notes on Fiscal Policy
- Fiscal Policy
- Criticisms -Fiscal Policy
- UK National Debt
- Does Fiscal Policy solve unemployment?
- Effects of Budget Deficits
- Advantages - Budget Deficits
- How Government finances national debt
- WHat does Government Spend its Money On
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