In the News Teaching Activity – how will the Budget’s fiscal changes affect the economy? (Nov 2024)

On 30th October 2024, the first female Chancellor of the Exchequer delivered her first budget, but how might it affect the macroeconomy?

In a higher-spending, higher-borrowing Budget, the UK government is increasing expenditure by £70 billion per year, funded half by taxes and half by borrowing. Public spending is set to reach 44% of GDP, with taxes at 38% by 2029. This includes a substantial £19 billion boost to public sector investment, aimed at strengthening infrastructure and services. The Chancellor’s two main gambles are that this large cash injection will significantly improve public services over two years and that the increased borrowing will yield long-term economic benefits. Spending growth is set to slow sharply after 2025, raising questions about efficient spending and fiscal discipline in light of rising debt pressures. The main changes are summed up by the BBC in their Key points a a glance.

1. What is a ‘fiscal policy’?

2. Using an AD/AS diagram, analyse the impact of an increase in public sector investment on growth?

3. Discuss whether ‘increasing expenditure by £70 billion per year, funded half by taxes and half by borrowing’ is likely to lead to a stronger macroeconomy? Use examples from the article for application.