Drivers That Caused the UK Public Expenditure to Increase - Essay Example

Public Spending Table of Contents (A) Drivers that Caused the UK Public Expenditure to Increase 3 (B) Reducing Government Spending 7 References 10 The economic condition throughout the world underwent many changes during the past few decades. There have been a lot of changes in the UK economy too. The changes were made to boost the development of the economic condition of the country. There were several public investment activities that enhanced the service level and along with it there was public finance deficit (Economics Help, 2009). (A) Drivers that Caused the UK Public Expenditure to Increase The public expenditure of the UK economy has increased from the year 1900 to the end of 20th century. There has been increase in the Gross Domestic Product (GDP) rate due to the public spending by the UK Government. The public expenditure was raised in the 20th century due to the impact of the world wars. Before the World War I, the public expenditure was about 15% of the GDP. After the war it appeared to be about 25% of the GDP and maintained the level in the next few years. It did change during the starting phase of depression in the economic conditions (Chantrill, 2010). After the World War II, the public expenditure had increased and it was budgeted to consume 35% of the GDP and this level was retained till 1950s. The public expenditure was slowly raised in the year 1960 and it increased in early 1980s consuming about 45% of the GDP (Chantrill, 2010). Public expenditure rose by 0.7 percent of the GDP from 1999-2008. A decade ago, according to the OECD statistics, UK public spending was registered at 8.7 percent of the GDP below the Euro area average. By 2008, this figure had been registered at 1.3 percent below the Euro area average (IOD, 2008). In the year 2000, the spending of the Government was less than £360 billion. (Clark & Dilnot, 2002). Defence Expenditure There were lot of instability in the public expending regarding the defence system. The spending in defence expense was increased before the World War II. 3.5% of the GDP was used in defence spending in the year 1935 and reached to 15.9% in 1939. After the commencement of the World War II, the British Government started to assemble most of its resources for the war. The expenditure was over 40% of the GDP on the defence system for four years and it was raised to 46.37% of GDP in 1943 (Chantrill, 2010). Expenditure for the Growth of State Education The public expenditure in development of the state of education was expanded from 2% of GDP in 1990 to 6% of GDP in the second decade of 21st century. The spending in this sector has been increased to 3.37% of GDP in 1955. During the starting phase of 1956 the spending was increased rapidly and it accounted to 4% of GDP in 1960 and 6.5% of GDP in 1975 (Chantrill, 2010). There has been a decrease in the spending during the period of 1970 to 1980. In 1989 it reached to 4.25% but after 1990 the spending has increased. In 2000 the spending in the education sector has raised from 4.34% of GDP in 1999 to a proposed figure of 5.95% of GDP in 2010 (Chantrill, 2010). The Expenditure for Steady Growth of Health There has been a boom in the health sector only after 1909 due to the National Insurance Act that was passed by the UK Government. The spending was 1.14% of GDP in 1921. The health expenditure increased in 1920s and 1930s that accounted to 1.91% of GDP at the beginning of the World War II. The spending reached to 3.07% of GDP just before the National Health Service was established in 1948 (Chantrill, 2010). The spending increased in 1970 to 4.0% of GDP and it became 4.98% of GDP in 1975. There was an increase to 5.64% in 1983 but it declined in 1988 to 5.16%. In 1993 there was an increase in the expenditure up to 6.31% of GDP but declined to 4.91% in 1998. After 1999, there has been increase in the expenditure and is planned to be 8.43% of GDP in 2010 (Chantrill, 2010). (B) Reducing Government Spending The reduction in the UK government’s expenditure upon the public sectors will reduce the public finance debts. This will help in reducing the interest rate payment that the government is offering to the private and other institutions like International Monetary Funds. There are possibilities to reduce the spending as the UK economy develops. Without increase in the economic growth it is not possible to reduce the expenditures that might result in accumulating unnecessary debts which might destabilise the economy (Haldenby & Et. Al., 2009). The emergency budget of 2010 was drafted by the UK Coalition Government towards enormous reduction in public expenditure. The Chancellor has stated that all the zones of government expenditure, excluding health and international development would be subjected to an average cut of 25%. It also comprises of two years pay freeze for the public employees receiving over £21000 per year. The cuts in the expenditure will account to £83 billion per year and decrease by the year 2014 and 2015 (NASUWT, 2010). Over the last decade the economy of the UK has become unbalanced and depended on sustainable public spending and upon the increase in the level of the public debts. For the economic support and sustainability in the medium terms, the policy was based upon broad economy supporting private sector jobs, investments, enterprises and exports (HM Treasury, 2010). The recent level of public expenditure of the borrowing risk undermines growth, economic stability and fairness in the UK economy. The public spending in overcoming the deficit is essential as it will reduce the loss of market confidence in the UK economy that will compel to sharpen fiscal adjustments. It will strengthen private sector confidence that will increase the job creation opportunities and support the growth level. It will aid to keep the interest rates low that will help the businesses and families with low costs of mortgages and loans. It will also help in reducing the debt and lower the debt interest rate and ultimately have a lower effect upon the tax payers’ burden (HM Treasury, 2010). To save £81 billion by the year 2014-2015 there was cut downs in the budget for public sector spending that started in the June 2010. In the 2010 budget, it was planned to generate savings more than £30 billion. £11 billion will be saved from welfare reforms, £3.3 billion from a two year block in public sector pay, £6 billion from efficiency savings and £10 billion from lesser debt interest payments (HM Treasury, 2010). The cuts in the government spending will affect the consultancy and big IT projects and the civil service recruitment will freeze. According to George Osborne, the huge cuts in the department are: “£683m (4.6% of departmental budget) at transport, £780m (7.2%) at Communities and Local Government, £836m (3.8%) at Business, £670m (1.1%) at Education and £325m (3.2%) Department for Justice” (BBC, 2010). This will be used in reducing the public debts. The cut in the spending has created a volatile environment in the industries. Since the investment in the public sector construction related industry has declined, there will be an increase in contest for work that will result in raising the demand on contractors to propose better value for money. Mr. Simons Rubinsohn, the chief economist at Royal Institute of Chartered Survey commented that the news of cut down of public spending created nervousness in the industry especially outside London (H&V News, 2010). The companies are planning for the exceptional intensity of the cutbacks as the Government of the UK cuts down the public spending in proposition to lessen the UK’s deficit budget. There are positive impacts as well as negative impacts of the UK Government’s decision in reduction in the public spending (H&V News, 2010). References BBC, 2010. George Osborne Outlines Detail of £6.2bn Spending Cuts. News. [Online] Available at: http://news.bbc.co.uk/2/hi/8699522.stm [Accessed December 17, 2010]. Clark, T. & Dilnot, A., 2002. Long Term Trends in British Taxation and Spending. The Institute of Fiscal Studies. [Online] Available at: http://www.ifs.org.uk/bns/bn25.pdf [Accessed December 17, 2010]. Chantrill, C., 2010. UK Public Spending Since 1900. Briefing. [Online] Available at: http://www.ukpublicspending.co.uk/spending_brief.php [Accessed December 17, 2010]. Economics Help, 2009. Historical National Debt. The UK Government. [Online] Available at: http://econ.economicshelp.org/2009/03/historical-national-debt.html [Accessed December 17, 2010]. Haldenby, A. & Et. Al., 2009. The Front Line. Reform. [Online] Available at: http://www.reform.co.uk/portals/0/Documents/Front%20line%20FINAL.pdf [Accessed December 17, 2010]. HM Treasury, 2010. Spending Review 2010. Report. [Online] Available at: http://cdn.hm-treasury.gov.uk/sr2010_completereport.pdf [Accessed December 17, 2010]. H&V News, 2010. Fears Grow Over Impact of Public Spending Cuts. News. [Online] Available at: http://www.hvnplus.co.uk/news/fears-grow-over-impact-of-public-spending-cuts/8601848.article [Accessed December 17, 2010]. IOD, 2008. Key Points. The IoDs View. [Online] Available at: http://www.iod.com/Home/Policy/Economy/Briefing-Papers/Briefing-Paper---Public-Spending/ [Accessed December 17, 2010]. NASUWT, 2010. The Case against the Cuts. NASUWT UK. [Online] Available at: http://www.nasuwt.org.uk/consum/groups/public/@education/documents/nas_download/nasuwt_007028.pdf [Accessed December 17, 2010]. Read More