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The Magic of the Fiscal Multiplier: Boosting GDP
One of the benefits of public spending, in addition to funding public services, is that it can increase GDP. The extent to which public spending supports the economy depends on the size of the fiscal multiplier.
Government spending creates income somewhere else in the economy. For example, UK current spending provides an annual income for 5.6 million public employees in the UK.
- A positive fiscal multiplier means that £1 of government spending will increase the size of GDP by more than £1. In the example of public sector employees, this happens because increased income of workers leads to increased consumption of goods and services elsewhere in the economy.
- This is particularly important in times of recession, when government spending can provide crucial support for the economy by preventing significant spending decreases (see automatic fiscal stabilisers).
The Many Uses of Multipliers: The Fraser of Allander Institute regularly uses multipliers to estimate the economic impact of policies, businesses and sectors. A high multiplier indicates that the business or sector has a positive economic impact. The following link provides an example of how economists use multipliers, predicting the impact of Scotland’s pharmaceutical industry.
