Article analysis
1) UK borrowing to hit record £394 bn as Sunak warns of ‘economic emergency’:
This article explains how the government has borrowed large sums of money to help British citizens get through the Corona Virus pandemic. It discusses the negative effects of the pandemic on our domestic economy and also speaks about how the borrowing will impact the future of the UK’s economy.
The Uk is facing an 11.3% fall in GDP this year. This means that aggregate demand and aggregate supply fell substantially this year. Even though government spending is higher than ever this year (due to the government’s support throughout the pandemic), consumption, which takes up roughly 60% of AD, has fallen heavily. Therefore, even though government spending increased, AD will have shifted inwards. Any inward shift in AD causes a decrease in GDP.
Aggregate supply has also shifted inwards because firms have not been able to produce as many goods throughout this pandemic. A decline in AD mixed with this decline in AS caused an extreme decrease in the UK’s GDP.
The article says that if no trade deal is established will Brussels (or the rest of the EU due to Brexit) by the end of the year, GDP will drop by a further 2% in 2021. This is because trade deals make it easy to export and import to certain countries. If no trade deal is established, the UK will not be able to export goods as easily or cheaply. This will cause value of exports to decrease and therefore cause AD to decline. This is what will cause the further 2% decrease in GDP.
The article continues to discuss the future effects of the extensive borrowing done by the government this year. An example of this is that many staff working in the public sector may not get raises in 2021. This could lead to public workers having lower real wages this coming year compared to this year as inflation rates are still positive (although low). As well as this, another cut made due to this years spending was to foreign aid. These cuts show that there was an opportunity cost to the expensive furlough and test and trace programmes. The opportunity costs were foreign aid, wage increases and more.
2) UK spending review 2020: the chancellor’s speech in full:
This speech explains how the virus has effected the UK’s economy in the last year and how it is going to effect it in the future. Mr Sunak also talked about his policies and how they are going to help the people affected negatively by the economic disaster.
One idea that the government has to help people that are paid the least is to increase minimum wage. Although this has obvious positives such as workers being paid more and wealth being more evenly distributed, it may also cause a further increase in unemployment. If we treat workers as a good, an increase in the price (wage) of the good will mean that less people can afford to buy it. This can be seen in the law of demand. If an employer must pay more, effective demand for the worker will decrease, causing more workers to be let go. This could be catastrophic as unemployment is estimated to reach 7.5% (2.6 million people) by mid 2021. Overall, for this scheme to work, the minimum wage will have to increase by a small amount in order to be effective and not back fire; the government are speculating to increase it by 2.2%.
The government’s aim, when making rational decisions, is to maximise social welfare; the government plan to increase the health budget by £6.6 billion in order to increase the number of nurses in the UK by 50,000. Apart from the current spending on their wages, the government are also investing the purchasing power into capitol spending: new MRIs, building 40 new hospitals and more. This project will not only increase AD because of the increase in government spending, but will increase AD further because on the multiplier effect. For example, the new nurses will spend their incomes by consuming. This increase in AD will cause an increase in real GDP which will help the slow and steady recovery of our economy.
The chancellor continues onto the matter of education and its budget. He describes brilliant aspirations about improving our education system and states that ‘year-on-year funding [will] increase by at least 2 percent’. However, the government’s aim for inflation rate is 2% as well. If funding increases by 2% but inflation also increase by 2%, nothing has changed.
