Improvement In The UK Economy

Improvement in the UK economy is usually dependant on the improvement of four major factors, economic growth, balance of payments, unemployment and inflation. This should lead to steady economic growth that would lead to a steady increase in the productive capacity in the economy. Income tax is the percentage of income that people are taxed upon that is given to the government. There are many policies that can be used to tackle these certain goals, for example fiscal and monetary policy. Fiscal is a change in government spending or taxation, an example of fiscal policy is to reduce taxation and thus give consumers more spending power, hopefully increasing economic activity. Monetary policy is centred on interest rates, for example reducing …show more content…
Monetary policy is used to alter interest rates to manipulate economic activity in the UK, in this case the Bank of England would reduce or increase the interest rates dependent upon their strategy for improvement in the economy. In this case, according to source F, consumers are encouraged to save due to the unhealthy economy being a result of massive amounts of consumer debt. For example “we are suffering the consequences of a decade of growth fuelled by debt.” And “politicians are encouraging us to save rather than spend money we do not have.” This increase in saving is a contractionary monetary policy designed to reduce consumer spending, an impact upon the economy would be a reduction in inflation, due to decreased demand pull inflation as there is not enough supply for the firms to match the needs of demand that is fuelled by excessive borrowing., the excessive demand drives prices up as there is too much money chasing too few goods. An increase in interest rates also tackles the issue of increased spending and thus an excess of demand in the economy accompanied by debt, as it will give consumers less incentive to borrow as the amount they must pay back will rise, this is also accompanied by an increased return on consumers money when they save. The long term effects of this policy may reduce firms incentives to expand and may even reduce the demand for their goods that market failure …show more content…
However it also has negative impacts such as the short term effects of consumers saving rather than spending due to low confidence, and also the budget deficit may not be able to give up the high source of income that is income tax and this may impact other areas of the economy and also has negative social impacts, such as upon welfare benefits. An alternative policy, monetary, also has its positives, decreasing consumer debt and decreased inflation, it also has many negative outcomes such as increasing unemployment, reducing firm’s incentives to expand due to a lack of demand and worsening the budget deficit. Therefore, the government should use the cut in income tax to improve the economy as it has less negative side effects than the alternative discussed, also this policy is the best policy for improving the economy in the short term and in the long term, where as the alternative is far more focused upon the short term improvement, however to lessen the negative impacts on the economy the government should wait until the government budget can improve, doing this will mean the budget deficit is not worsened by an amount that could be devastating to the economy and will enable this policy to