Spend

Government spending is to high a % of GDP in the UK. The Government should reduce its spending and allow the free market to allocate more resources. Discuss this assertion

The Government's decisions on public spending are very important in determining the nature of the UK economy and how successful it is in achieving its macroeconomic objectives. Governments have to choose whether to use expansionary fiscal policy and have a more prominent role in the allocation of resources in the economy or can opt for a contractionary policy, allowing the free market to allocate resources and this decision has significant impacts on different areas of the economy. I agree with the statement and believe that the UK government should cut its spending in the economy

One reason why I believe the government should reduce its spending is because of the risk of resource crowding out if the government maintains its high level of spending. The UK's high level of public spending means it's borrowing is significantly high which has an undesirable effect on interest rates – raising it. This reduces the economy's capacity to lend and increases the cost of capital and labour which discourages the private sector from investing in expansion projects. This is a significant loss for the UK economy as such projects, particularly in the infrastructure industry, would increase the UK's economic capacity, shifting AS to the right, and therefore contributing to economic growth. It can be argued that the government can find a way around this problem by exploiting its output gap and using unemployed resources which would help to reduce the impact of the increases in the cost of capital and labour. However, the UK's deflationary gap has been steadily falling since 2008 which limits this as a potential solution to the problem. Also, private firms tend to fund such projects through borrowing and the increased cost of this from the rise in interest rates would discourage them to do so as the opportunity cost of borrowing money has increased. Moreover, when the private sector lends money to the government to fund public spending, it has less money to invest in private-run projects, which tend to be more efficient and profitable. This is because the private sector's aim is to maximise profits whilst the government is more focused on the provision of services regardless of profitability.