Discuss the view that the measures taken to reduce the size of the budget deficit will inevitably result in a rise in unemployment in the UK.
The budget deficit of the government is the amount that needs to be borrowed in order to allow the government to spend what they want to. The budget deficit can be reduced by either tax increases or a reduction in government spending, whilst the growth in the economy can also decrease the deficit. The main reason for unemployment occurring is less demand for goods and thus less supply being needed, leading to structural unemployment.
The budget deficit of the UK was said to be £107million at the end of 2013 and to reduce this debt the fiscal policy was to keep high tax rates and encourage spending, as well introduce a number of spending cuts on areas such as on the NHS and welfare benefits. This will increase unemployment levels from the already high 7.1%. The government cuts affect the circular flow diagram as there are less transfers to households, therefore decreasing their disposable income, and there are also less government purchases for businesses which means that they make less money and the aggregate demand decreases. The aggregate demand of the country would decrease as a number of public sector jobs would be made redundant and so people would have less disposable income to spend meaning that demand decreases and therefore other businesses will have to cut back on how much they supply, thus making more workers redundant.
CIRUCLAR FLOW DIAGRAM
If taxes on producers are increased then the producers will not be able to make as much revenue and therefore will have to make workers redundant to cut production costs and stop profits falling too much and worrying shareholders. This would obviously lead to unemployment increasing. In more extreme situations the firms may even decide to leave the country to go somewhere with lower taxes to make more profit, and as a result make all the workers in the first country redundant. The other outcome is that the producer could decide to shift the incidence of the tax onto the consumer, however if the price is elastic then this would reduce the amount of demand, thus again reducing revenue. Taxes on consumers would also decrease demand due to people having less disposable income and thus jobs would have to be cut to keep revenues the same.
To save money on labour costs in the long-term some firms may decide to invest in technology and thus make even more jobs redundant. Others may also lose their jobs as they may not have the skills needed to run the machinery or execute their new tasks.
However, unemployment may not rise as a result of government spending cuts as the government cutting public services means that the private sector’s output increases and private sector companies may start to hire more employees as they look to take advantage of reduced services such as in education, where more people would turn to private education if they felt that the public system was underfunded. By employing more people, the private sector is carrying the burden of the jobs lost in the public sector. Although this may not always happen as businesses would be cautious about hiring more employees in uncertain times. Also, new jobs created by the private sector are unlikely to fully compensate for the job losses in the public sector.
Another reason that unemployment may not rise in the long-run is that those who have been made unemployed as a result of the government cuts in spending may use their innovation and skills to start their own businesses, and if these start-ups are successful then they will be able to employ more people and unemployment may decrease.
Overall, strategies to reduce the budget deficit, namely tax increases and government cuts, do make unemployment rises almost inevitable due to the decrease in aggregate demand and thus the decrease in supply needed. However, the private sector may partly reduce the burden by employing more people to provide for the services lost in the government cuts.
AS/AD DIAGRAM
