Essay: Should the UK government try to increase the Rate of Economic Growth?

Currently economic growth averages 2.5% a year. If the rate of growth increased it would mean people saw a faster increase in their financial standard of living. They would be able to consume more goods and services.

The government would benefit from increased economic growth. It would see its tax revenues automatically increase. E.g. revenue from income tax and VAT would increase as people earnt and spent more. Also the government would pay less on unemployment benefits. The improvement in the fiscal position would enable them to spend more on important public services like health, transport, and education.

Higher rates of economic growth would create higher levels of employment, reducing unemployment. However, if unemployment is already quite low, firms may struggle to find staff to take on and this could cause wage inflation.

Increasing economic growth could cause a rise in inflation. This is because if growth is above the long run trend rate the economy does not have sufficient capacity to meet demand.

However it is possible to increase the growth rate without causing inflation. If the government increase economic growth by promoting productivity and the supply side of the economy then there will be an increase in AS as well as AD. Therefore the growth will be non inflationary. It depends upon the nature of economic growth.

A potential problem of increasing economic growth is that it could magnify environmental problems. Higher output will lead to higher levels of pollution and emissions of CO2 this would make the serious economic problem of global warming even worse. The recent Stern report suggests if we do not act to combat global warming then there could be serious economic and humanitarian costs in the future.

However it is possible that economic growth could be used to help environmental problems. For example economic growth may lead to improved technology which reduces pollution levels. The government could use tax revenues to find ways of reducing Carbon emissions. If growth came from using renewable energy supplies then it would not be problematic.

In conclusion it depends upon the nature of economic growth. With increasing concerns over global warming it is important for governments to manage growth in a sustainable way. There is little to be gained by increasing temporary growth rates if it results in both inflation and increased pollution levels. It is more beneficial to keep the growth rate close to the long run trend rate of 2.5% and work on improving living standards rather than just GDP figures.



Published November 28, 2012 | Tejvan Pettinger
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