Micro and macro economic impacts of the spending review.

The new 2020 budget has purposely been greatly increased to account for the devastating effects of the Coronavirus. Unlike the 2008 recession where the government enforced a tighter budget in an attempt to reduce deficits, the Chancellor of the Exchequer has adopted a more hands-on approach and has massively increased government spending. The public services funding to tackle coronavirus is expected to total £55bn.

The UK is forecast to borrow a total of £394bn this year, equivalent to 19% of GDP. This being the highest recorded level of borrowing since World War 2. This increase in spending will lead to the multiplier effect. The multiplier effect is the idea that an increase in initial injections (government spending) will lead to a higher, overall increase in the economic situation in the UK. This will happen because as govt spending increases then there will be an increase in workers incomes who will spend more, therefore, increasing demand for products and the amount of aggregate supply in an economy. This technique is used to kickstart the struggling economy and increase the circular flow of money through an economy.

The government has also increased spending hugely on those effected the worst by Covid-19 with over £3bn to be spent on local councils. This will have positive effects on the economy due to the fact that less privileged people tend to have a larger marginal propensity to consume (spend more). Therefore meaning that any money invested in improving these peoples lives will also have positive effects on the economy as a whole as money continues to flow through the economy.

Overall, Rishi Sunak’s spending review will likely lead to a faster recovery from the global pandemic that has depleted this economy. This is due to the hugely increased government spending plan that aims to restore the country to its former glory economically by 2026.