Macroeconomics-long run effect on budget cutting in the uk Essay

Macroeconomics-long run effect on budget cutting in the uk - Essay Example One of the primary concerns of the governments in UK, both the previous Labour Government and the present government, has been to reduce the public borrowing to sponsor the expenditure of the government (Giudice, Kuenzel and Springbett, 2012). The agenda behind the reduction in the public spending is that it is believed that the economy will grow faster in the medium-term. The simple economics behind the fact is that if business corporations believe that the economy will grow in the medium-term then the confidence in them increases which raises their present level of investment. On the other hand the consumers increase their spending with the belief that the economy will grow in the future. However, the standard component of GDP can be represented as (Mankiw, 2011): This implies that with reducing in spending by the government the total output of the economy falls. However, it is now an established economic convention that the level of output will increase up to a certain point with rise in government spending after which it tends to fall (Lilico, 2012). If the government follows a contractionary fiscal policy, which implies a reduction in spending by the government then the magnitude of impacts of the same is different in case of an open economy and closed economy. A closed economy structure is one that can be described as an economy which involves in no trading activity. A closed economy is assumed to be self-sufficient and all the needs of the consumers are met from inside which eliminates the need of the economy to have any trading relations with the outside world. An open economy on the other hand is the one which has sufficient treading relations with the other countries in the world and there are no barriers to the development of the free market forces. An ideal open economy is the one that is characterized by