Healey's Budget needs to sustain the stronger economy through gathering clouds
Real-world example for IB, A-Level, AP and IGCSE Economics essays: Fiscal policy, Economic growth and the business cycle
What happened
The article discusses how Healey's Budget needs to support the economy while growth looks positive now but may become harder by January.
The economics
A budget is a fiscal policy tool: the government can change taxes and spending to influence aggregate demand and support output and employment when the economy weakens. The article also points to the business cycle, since the economy is positive now but conditions could become trickier in January, so policy must prepare for a possible downturn.
Evaluation
Fiscal policy involves time lags, so budget measures may not arrive in time to offset the January risks; and if slower growth comes from external demand or a supply shock, fiscal expansion alone may have limited effect.
Practice question
Using the context of Healey's Budget, discuss the role and limitations of fiscal policy in stabilising the economy when growth slows.
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.
- 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