Budget 2026: key points at a glance
Real-world example for IB, A-Level, AP and IGCSE Economics essays: Fiscal policy, Economic growth and the business cycle, Government debt and deficits
What happened
The chancellor, John Healey, has set out his first budget, including a £100 payment to households to help them cope with 'global economic storms', while the UK growth forecast for 2027 was cut.
The economics
The budget illustrates the mechanism of expansionary fiscal policy: direct transfers to households support disposable income and consumer spending, cushioning aggregate demand against an external shock. At the same time, the downgraded growth forecast shows that fiscal measures do not necessarily reverse a downturn in the business cycle, which makes it useful for discussing multipliers and the limits of fiscal policy.
Figures to quote
- £100 payment to households
Evaluation
Direct payments can quickly support spending by lower-income households, but if the 'global economic storms' are an external supply shock, fiscal stimulus has limited effect on output and may add to deficits and government debt; the trade-off between short-run relief and long-run growth is worth assessing.
Practice question
Using this example, evaluate the effectiveness and limitations of expansionary fiscal policy in responding to an external economic shock.
Read the article ↗ · Draw the diagram in the Diagram Lab
Where it fits in the syllabus
- Fiscal policy: The government changes spending and taxation to influence aggregate demand and economic activity.
- Economic growth and the business cycle: Long-run growth in real GDP and the short-run swings between expansion and recession, when output falls below potential.
- Government debt and deficits: Spending above tax revenue creates a deficit; deficits add up to debt, which can raise interest rates or crowd out private investment.
- IB Economics: Fiscal and Monetary Policy, Measuring Economic Activity, Aggregate Demand and Supply
- A-Level Economics: Economic Policy, Macroeconomic Objectives, Aggregate Demand and Supply
- AP Macroeconomics: National Income and Price Determination, Long-Run Consequences of Stabilisation Policies, Economic Indicators and Business Cycle
- IGCSE Economics: Government Macroeconomic Policy, Macroeconomic Objectives