The Government Policy When the Economy Is Not Growing - Essay Example

Government Policies Name Course Lecturer Date The government policy when the economy is not growing. Economic policies are the actions taken by the government in the economic field. It involves the setting of interest rates, regulation of the labor market, controlling the budget among others. Such actions are influenced by various international regulatory bodies. For instance: the World Bank, international monetary fund, political objectives as well as party policies. There are several types of economic goals, each set to attain specific objectives. Examples include; macroeconomic stabilization policy. This policy is set in place to ensure that the supply of money is growing at a rate that will not lead to excessive inflation. To achieve this, the government uses the fiscal and the monetary policies. Fiscal policies regulate and influence the aggregate demands level in an economy and as a result, economic objectives of full employment, price stability and economic growth are achieved. In order to stimulate the aggregate demand, the government decreases the tax rates and increases its spending. When the economic boom begins, the tax rates are increased and government spending reduced. Under the monetary policies, the government works towards the control of money in the economy by lowering interest rates so as to encourage expansion of businesses or by raising the interest rates resulting to a reduced money supply in the economy. Other examples of economic policies include the trade policies, policies designed to create economic growth, industrial policies, policies dealing with redistribution of properties, income, and wealth, as well as technology –based economic development policy. This paper discusses on the policies that the government puts in place when the economy is not growing. More focus will be on why the British government pursues austerity in times when the economy is not growing. Austerity refers to a government policy that is put in place in times of adverse economic conditions in order to reduce budget deficits. It includes increasing tax rates and reducing government expenditures and pensions. Such measures are taken when the government has been loaned in foreign currencies and are unable to settle its debt liabilities. Cutting on government expenditure leads to the reduction of future debts. As a result, investors and financial institutions demand high interest rates due to their mistrust in the government’s ability to pay. As a last resort, inter-governmental institutions can opt to demand for austerity measures in exchange of being the government’s lender. Larrain (2001) noted that, a government that is large and growing incurs higher expenditure. As a result the overall performance of an economy is slowed down. In order to finance its raising costs, the government increases its borrowing or taxes. In return individuals are discouraged to search for jobs due to the increase in income tax. Consequently, the country’s aggregate demand is reduced thereby affecting the economic growth. Some of the reasons that cause government spending result to the reducing of the economic growth rate include; the displacement costs, where government expenditure displaces activities of the private sector and thereby reduces the economic growth rate. As a result of the above stated benefits, the British government has opted to implement austerity policy measures so as to enhance its economic growth. For a government to spend, it requires funds. The options available to acquire these funds have adverse effects to the economy. They include imposing high rates of tax on savings, income and investments. In case the government borrows its funds, it deprives the private sectors the same and as a result, may lead to an increase in the interest rates and an economic distortion thereof. Notably, some of the government spending is on activities that do not generate any income and have a negative effect on the economy since high costs were incurred in their implementation. In a competitive market, buyers and sellers determine prices and ensure that prices are allocated in the most efficient way. However, introduction of subsidies by the government interferes with pricing especially in the health and the education center causing inefficiency. There is therefore the need for the British government to reduce its spending as this would lead to increased incomes and the growth of the economy enhanced. Ways in which the British government reduces its spending include cutting down on operational costs and listing down the priorities. This is attained by negotiating contracts, use of benchmarks to improve performance as well as purchasing things in bulk due to economies of scale. In addition, the government can conduct a review of the spending plans in order to identify the areas that are likely to issue great economic returns. Where a government’s objective is dependent on more than one department, such departments work closely in order to reduce costs (Ramey, 2009). Other austerity measures that the British government puts in place in order to cut its spending include limiting of unemployment benefits as well as the pension payable, cutting programs for the poor, reduction of the employees in government as well as extending the eligibility age for health care benefits and the age for retirement. However, it is important to note that, when government spending is very minimal, economic growth is very little. This is because it would be difficult to enforce contracts, developing infrastructure and protecting property. Government spending becomes a burden when funds are misallocated or when the government size is too large. Since government expenditure cannot be eliminated, the British government works towards ensuring that the costs of government spending do not exceeds the benefit. To have a court system, police and military force that are working are of economic benefit to the society. However, for the government to provide such services, it requires finances from the citizens. Such financing is acquired through taxation. It can be noted that, a society that pays taxes has a higher economic growth level that the one that does not levy taxes. Therefore, the British government enhances its growth rate by increasing value added tax. Strict measures are put in place to target tax evaders and heavy penalties imposed on them. This revenue is in return used in hiring of more judges and paying for other services that are beneficial to the society. Having a stable police force ensures that the citizens do not incur expenses on personal security and instead engage in activities that are more productive. A court system that is working enables individuals enter into beneficial contracts, thus creating an opportunity for growth. The revenue from increased rates of tax is used in construction of infrastructure which in return contributes greatly to the prosperity of the country (Romer et al, 2001). Lowering of interest rates is another way through which the British government enhances its economic growth. This leads in the lowering of the staring pounds value. As a result, trade balance is improved. A decline in the currency value results in the country’s goods attaining a competitive edge internationally. Consequently, Imports become more expensive and as a result they are substituted with the locally manufactured products. This promotes local trade since the locally manufactured products demand rises. In the same wavelength, the lower valued currency results in country’s exports being cheaper. Therefore the country acquires a competitive edge in the international market. Increasing the exports and reducing the imports leads to the country’s economic growth. Another benefit of lowered interest rates is that domestic consumption and investment is boosted. This is because it becomes relatively cheaper for individuals and firms to borrow funds in order to invest in research and development, plants and equipment and marketing of their products. Consumption is encouraged since the lowered interest rates make saving unattractive. This allows consumers to finance their debts instead. The consumer benefits since they are able to acquire loans in order to pay for houses and cars. The British government enhances its economic growth through privatization of the company that it owns. This involves selling of such institutions to individuals in the private sector. Through privatization, the country can earn foreign expertise and the expansion of the industry. Where foreign loans have been acquired, the burden to repay them is reduced since the government will repay them using the sales proceeds. Privatization reduces political pressure on the industries that are government owned when their ownership is transferred to private owners. Profitability and efficiency in the operations of such enterprises is enhanced. Non-development expenditures are reduced and at the same time there is improvement in their administration. After privatization, the government does not need to finance any loans that such an enterprise had acquired. Such funds can be used in the construction of infrastructure, thereby enhancing economic growth. In case of a foreign investor, the latest technology will be adopted so as to increase the output. This will in return increase the national product and causing the national income to grow. From the discussion above, it is evident that austerity measures enhance growth in a non performing economy. This is achieved by the government reducing its expenditure, increasing of value added tax, lowering interest rates among others. In return, the government is able to repay its debt liabilities to foreigners. REFERENCES Larrain, F. Economic Development in Central America. Cambridge, Massachusetts: Harvard University Press, 2001. Ramey, V.A. "Identifying Government Spending Shocks:Its All innthe Timing." The Quarterly Journal of Economics (2009): 11-25. Romer, C and D.Romer. "The Macroeconomic effects of Tax Changes." American Economic Review,Volume 100,Number 3 (2010): 763-801. Read More