This document discusses fiscal policy in the UK. It provides information on UK government spending, including that social welfare and healthcare are the largest items. It also shows data on government consumption, investment, spending and tax revenue as a percentage of GDP from 1980 to the present. The document discusses the UK's fiscal deficit reduction policies under the Conservative government, including spending cuts and tax increases. It outlines arguments for and against the government's austerity policies aimed at reducing the budget deficit. Finally, it defines some key terms related to fiscal policy economics.

1. Fiscal Policy in the UK
A2 Macro – June 2016

2. Breakdown of UK Government Spending in 2015-16
Social welfare protection is the largest element of government spending,
with the NHS and Education the biggest single departmental items.

3. Government Consumption & Government Investment
14.0
16.0
18.0
20.0
22.0
24.0
26.0
28.0
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
UK Government Consumption and Government Investment
Consumption: Spending on public services
Investment: Public sector capital investment
Expressed as a % of GDP
Government consumption Government consumption plus government investment
Total government expenditure also includes social security and other transfers

4. Total UK Government Spending and Tax Revenue
Source: International Monetary Fund, data from 2015 onwards is a forecast
500
550
600
650
700
750
800
850
2010 2011 2012 2013 2014 2015* 2016* 2017* 2018* 2019* 2020*
Revenue/Spendinginbillionpounds
Revenue Spending

5. Government Spending and Tax Revenue – Since 1980
Source: Office for Budgetary Responsibility, data from 2016 onwards is a forecast
30
32
34
36
38
40
42
44
46
48
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
2017-18
2018-19
2019-20
2020-21
Government Spending and Tax Revenues in the UK, % of GDP
Current receipts Total managed expenditure

6. The UK Budget Balance and National Debt
Source: OBR, July 2015
Public Sector
Borrowing
% of GDP
Public Sector Net Debt
% of GDP
2007–08 2.7 36.7
2008–09 6.7 49.0
2009–10 10.2 62.0
2010–11 8.6 68.7
2011–12 7.0 72.3
2012–13 7.2 76.7
2013–14 5.7 79.1
2014–15 4.9 80.5
2015–16 4.0 80.2
What is government
borrowing?
Public sector borrowing
is the amount the
government must
borrow each year to
finance their spending
What is national debt?
Public sector debt is a
measure of the
accumulated national
debt owed by the
government sector

7. Countries with Highest Gross Government Debt (2015)
246.14%
172.73%
133.76%
132.82%
131.82%
129.24%
126.35%
121.08%
115.89%
107.75%
107.11%
106.91%
106.57%
105.67%
105.06%
0.0% 50.0% 100.0% 150.0% 200.0% 250.0% 300.0%
Japan
Greece
Italy
Jamaica
Lebanon
Enritrea
Portugal
Cape Verde
Bhutan
Ireland
Grenada
Antigua and Barbuda
Belgium
Cyprus
United States
Public (government) debt as a percentage of GDP

8. Government Borrowing and Bond Interest Rates
When a government borrows it issues debt in the form of bonds. The
yield on a bond is the interest rate paid on state borrowing
• Purchasers of
government
bonds include
pension funds,
insurance
companies and
overseas
investors.
• The % yield on
debt has been
very low in
recent years for
countries such
as the UK.
7.42%
2.57%
2.26%
1.73%
1.57%
1.1%
0.88%
0.85%
0.81%
0.8%
0.71%
0.55%
0.31%
0.25%
0.0% 2.0% 4.0% 6.0% 8.0%
Greece
Portugal
United States
Spain
Italy
Ireland
France
Belgium
Austria
Finland
Netherlands
Germany
Japan
Luxembourg
Yield (%) on 10 Year Government Bonds for Selected Nations

9. Yields on UK Government Bonds
The chart shows the per cent yield on a selection of UK government
bonds of different maturities
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
2014
Jan
2014
Mar
2014
May
2014
Jul
2014
Sep
2014
Nov
2015
Jan
2015
Mar
2015
May
2015
Jul
2015
Sep
2015
Nov
5 year
10 year
20 year

10. UK and Global Government Bonds
Global government bond interest rates have been falling over the last
8-10 years even though some countries have seen an increase.
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2007 Q3 2008 Q3 2009 Q3 2010 Q3 2011 Q3 2012 Q3 2013 Q3 2014 Q3 2015 Q3 2016
Global bond yields, 20 year bond interest rates
UK gilt (Mar) Global (Mar)

11. • The UK government has a fiscal deficit-reduction policy with the emphasis on
cutting government spending in some areas in real terms and a series of direct
and indirect tax increases:
• Key policies for fiscal deficit reduction:
1. Rise in standard rate of VAT to 20%
2. Rise in the rate of employee national insurance contributions (11%)
3. Deep cuts in real government spending e.g. for local authorities, defence etc.
4. Welfare caps including £26k pa cap on annual welfare payments for each family
Some taxes have been cut
1. A series of cuts to corporation tax
2. Freezing of fuel duties (meaning a cut in real terms)
3. Increases in the value of the income tax free allowance to £10,600
4. Cuts in employer national insurance for the long-term unemployed
5. Freezing of council tax (so that the level of council tax falls in real terms)
The UK Government has also been helped by lower interest rates on newly issued
debt as a result of the quantitative easing policy by the Bank of England
UK Government’s Fiscal Austerity Policies

12. In the July 2015 Budget, the
Chancellor George Osborne
announced a new fiscal rule.
The government’s fiscal rules now
include a target for a budget
surplus by 2019/20 and for all
subsequent years when in
‘normal times’.
Economy will be viewed as being
in ‘normal times’ if real annual
real GDP growth is above 1%
Balanced budget
when G= T
Normal times – a full
economic recovery
UK Government’s New Fiscal Rule (2015)

13. Austerity – Is Cutting Government Spending Right?
Is the Conservative Government right to continue following a policy of
fiscal austerity in order to reduce the size of the budget deficit?
-150.76
-123.54
-128.71
-98.33 -101.64
-78.88
-54.66
-33.17
-15.84
-0.45
2.87
-160
-140
-120
-100
-80
-60
-40
-20
0
20
2010 2011 2012 2013 2014 2015* 2016* 2017* 2018* 2019* 2020*
Budgetbalanceinbillionpounds

14. Austerity – Is Cutting Government Spending Right?
Is the Conservative Government right to continue following a policy of
fiscal austerity in order to reduce the size of the budget deficit?
• Arguments In Favour:
1. Reducing debt in long run
interests of economy – helps
to keep UK taxes lower
2. Shrinking state encourages
private sector growth
3. High opportunity cost from
£billions on debt interest
4. Cutting deficits increases
investor confidence –
attracts FDI into the UK
5. Upturn of cycle is time for
government to borrow less –
ahead of another downturn

15. Austerity – Is Cutting Government Spending Right?
Is the Conservative Government right to continue following a policy of
fiscal austerity in order to reduce the size of the budget deficit?
• Arguments In Favour:
1. Reducing debt in long run
interests of economy – helps
to keep UK taxes lower
2. Shrinking state encourages
private sector growth
3. High opportunity cost from
£billions on debt interest
4. Cutting deficits increases
investor confidence –
attracts FDI into the UK
5. Upturn of cycle is time for
government to borrow less –
ahead of another downturn
• Arguments Against:
1. Austerity is self-defeating
e.g. if it leads to deflation
2. Government bond yields are
low – a time to invest more
3. Infrastructure investment
will increase AD and LRAS
4. Wrong to cut spending when
economy is in liquidity trap
5. Economic growth is needed
to pay back the debt and
fiscal austerity makes this
harder to achieve

16. Fiscal Policy Economics – Some Key Terms
Bond Yield
The rate of interest paid on government debt e.g. on a
10 year bond (loan)
Budget (Fiscal) Deficit
The budget deficit is the difference between what the
government receives in revenue and what it spends
Cyclical Fiscal Deficit
The size of the deficit is influenced by the state of the
economy: e.g. in a boom, tax receipts are relatively high
and spending on unemployment benefit is low
Direct Taxation
Taxes on income, profits and wealth, paid directly by the
bearer to the tax authorities.
Fiscal Policy
Taxation and spending measures that allow the
government to guide the macro-economy.
Indirect Taxation
Taxes on expenditure (e.g. VAT). They are paid to the tax
authorities, not by the consumer, but indirectly by the
suppliers of the goods or services.
National Debt
Debt is the total amount owed by the government which
has accumulated over the years.
Structural Fiscal Deficit
The structural deficit is that part of the deficit which is
not related to the state of the economy. This part of the
deficit will not disappear when the economy recovers.

17. Fiscal Policy in the UK
A2 Macro – June 2016