Discuss the likely macroeconomic effects of a decrease in government expenditure on the UK economy

Edexcel AS-Level Economics Paper 1 June 2025 Extract

Discuss the likely macroeconomic effects of a decrease in government expenditure on the UK economy. Use an aggregate demand and aggregate supply diagram to support your answer. (15 marks)

Paragraph 1

1. one macroeconomic effect of a decrease in government spending is a decrease in economic growth
2. lower spending on welfare benefits can lead to a fall in disposable incomes in low-income households
3. extract a mentions stricter benefit rules for people who can work but do not take a job offered to them
4. this is a factor of aggregate demand, so this would shift left as a result
5. additionally, low income households have a high marginal propensity to consume (MPC)
6. therefore, since the multiplier k=1/(1-MPC), aggregate demand can shift further to the left
7. this can cause real gdp to fall from y1 to y3 as shown in the diagram below, as well as causing the price level to fall from pl1 to pl3
8. this could risk starting a deflationary spiral, which could lead to a recession.

Evaluation

1. however, lower benefits in the long-run should have two positive effects
2. firstly, it incentivises people to search more desperately for work
3. secondly, it reduces the budget deficit as less spending is needed on benefits and more tax revenue can be collected from income tax on work
4. over time, this should enable the government to spend money on other areas, which can lead to a recovery and an increase in economic growth.

Paragraph 2

1. another impact of the government cutting spending is that it could increase the UK's trend rate of economic growth.
2. lower spending on benefits leads to an increase in the incentive to work.
3. this can lead to an increase in the supply of labour, as the opportunity cost of not working is now higher.
4. higher labour supply means that there is an increase in the quantity of factors of production, leading to a right shift in the UK's long-run aggregate supply.
5. the extract mentions that the aim is to unlock the potential we have at home.
6. additionally, as there is more competition for low-skilled jobs, this encourages other members of the workforce to upskill to improve their pay, which can lead to further gains in productivity,

Evaluation

1. however, this depends heavily on which forms of spending are being cut.
2. for example, if the government were to cut spending in areas such as infrastructure projects, this would have the opposite effect on the trend rate of growth
3. the government have cancelled parts of the HS2 project which was meant to increase geographical mobility of labour
4. this would have led to higher productivity and more economic growth
5. the extract does mention that the government are actually increasing spending in other areas such as subsidies for childcare, which means that the government are making spending cuts and spending increases in areas which should improve the trend growth rate of the economy

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