‘A pretty grim picture’: outlook for UK living standards slashed despite Healey’s budget
Real-world example for IB, A-Level, AP and IGCSE Economics essays: Supply shocks, Fiscal policy, Economic growth and the business cycle
What happened
The UK's OBR warned that war in the Middle East is weighing on growth and could trigger a fresh cost of living crisis, while Chancellor Healey offered households a £100 payment to help them through 'global economic storms'.
The economics
A war in the Middle East acts as an external supply shock: higher input costs, such as energy, raise firms' costs and squeeze real incomes, which lowers growth and intensifies cost of living pressure; this can be shown as a leftward shift of SRAS in an AD-AS diagram. The government's one-off £100 transfer is a fiscal response that mainly supports demand and cannot remove the supply-side cost increase.
Figures to quote
- £100 payment to households
Evaluation
A one-off payment gives only short-term relief to some households, is limited in scale, and may add to aggregate demand, weakening the anti-inflation effect; longer-run living standards depend more on productivity and supply capacity than on a single transfer.
Practice question
Using the AD-AS model, analyse how an external supply shock affects UK growth and living standards, and evaluate the effectiveness of a one-off government payment in response.
Read the article ↗ · Draw the diagram in the Diagram Lab
Where it fits in the syllabus
- Supply shocks: A sudden change in supply, such as energy, food or supply-chain disruption, that moves prices and output.
- 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: Demand, Supply and Elasticity, Aggregate Demand and Supply, Fiscal and Monetary Policy, Measuring Economic Activity
- A-Level Economics: Supply and Demand, Aggregate Demand and Supply, Economic Policy, Macroeconomic Objectives
- AP Macroeconomics: National Income and Price Determination, Long-Run Consequences of Stabilisation Policies, Economic Indicators and Business Cycle
- AP Microeconomics: Supply, Demand and Market Equilibrium
- IGCSE Economics: Demand and Supply, Government Macroeconomic Policy, Macroeconomic Objectives