BUSINESS ENVIRONMENT

Business Environment

Business Environment

Question No. 1

With reference to the UK economy, discuss whether cutting government spending is a sensible policy. Ensure that you discuss both sides of the debate and limit your answers to the underlying economics.

Discussion

Since World War II in many countries there is a widespread belief that it was necessary to increase public spending to absorb the relatively larger public sector. This belief stemmed from the view that increased government intervention was the best way to achieve certain economic and social goals.

However, since recent decades has put into question the validity of such an opinion. Not only has been a growing skepticism about the potential achievements of public spending, but have also been increasingly recognized undesirable side effects to finance this spending by the government. In particular, the emphasis that has been getting lately on the structural aspects of economic performance has highlighted the risks of disincentives to growth that may result from a situation where the government tries to do too much. This was one reason among many others, that deliberate policies have been applied to limit the growth of public spending, and even to reduce their level or weight (Friedman, 2010, pp 45-78).

Thus, various researches has been done on to judging the effect of government spending or the because of their lack how it impacts on the economic growth. There was a study conducted that shows that a fiscal multiplier around 0.3 to 0.5. Therefore the cut back seen in the spending of government says that 15 will reduce the actual GDP growth with the difference between 0.3 to 0.5%.

The research suggested that the different retrenchment types have various effects. The cutting spends has the less nasty effect on the GDP than increasing the taxes. It relates to lesser effect the household confidence and incomes, thus making a difference to the consumer spending. There is a fixed reaction for either cutting the government cost or not. The UK's difficulties are placed into an international context, and the potential effects on jobs are outlined. Analysts named the companies thus, including the software firm Logica that is dependent on the public sector for 60% of its UK revenue, marketing organisations such as WPP and media groups including Trinity Mirror, as among those that could be affected by the cuts. Logica said it had not yet felt the impact of government cuts, but that it was looking to diversify its UK business. The government has contracts with most of the big consultants, including McKinsey, Capgemini, Deloitte and Ernst & Young (Katie, 2012, p 56-78).

The Control of Public Expenditure

Nevertheless, the increased share of public expenditure in GDP was accompanied by a smaller increase in tax revenues to the fund and, since 1975, recurring deficits. The latter justifies the implementation of policies of "control" of public spending, especially as France's European commitments constrain the evolution of public finances (Stability and Growth of 1997, establishing the "European semester" to improve the coordination of economic and fiscal policies in ...