Knowledge Checkpoint: Explain how changes in government spending can influence the economy, providing examples of austerity and expansionary policies
- Expansionary Spending: During recessions, government spending can support the economy by stimulating demand. For example, during the Covid-19 Pandemic and current cost of living crisis, the UK government’s support spending totalled around £310-410 billion, supporting millions of vulnerable households.
- Fiscal Multiplier: Government spending creates income elsewhere in the economy, potentially increasing GDP. For instance, UK current spending provides an annual income for 5.6 million public employees in the UK, leading to increased consumption of goods and services elsewhere in the economy.
- Austerity Policies: The government may choose to pursue austerity policies, involving the reduction of public spending to reduce the deficit. This was seen in the Conservative Liberal Democrat Coalition Government in 2010, following the Great Financial Crisis.