The U.K Governments Policy of Deficit Reduction - Essay Example

? Critically discuss the U.K government’s policy of deficit reduction. In the official European Union’s league table it has been seen that the UK hasthe third largest budget deficit in Europe (Rowley, 2011). In order to reduce the deficit the government has to adopt a policy which would ensure reduction in wasteful expenditure and careful adoption of those policies that would ensure economic growth (UK economic policy). The emergency budget in the month of June in 2010 made it quite evident that a policy of “fiscal austerity” will be followed by the new coalition government. The government is planning a consolidation of ?126 billion every year by 2015-16. It would include an increase in taxes amounting to ?30 billion and a reduction in spending of ?95 billion. Out of the spending cuts that were planned ?14 billion was planned in 201 1-12 (Great Britain: H.M. Treasury, 2011, pp.9-10 & 18). The government in their budget has announced reforms in case of Annually Managed Expenditure (AME) which includes welfare and public service programs. The government has made sure that there is immediate implementation of the reforms. This is evident from the fact that the tax plans for 2011-12 which was confirmed in June 2010 has been implemented and even an increase in VAT to 20% with effect from January 4, 2011 (Hoban, 2011, pp.1-13). The government had adopted a policy which was based on a severe cut in public spending so as to ensure a “dent in the demand.” Such policies have led to changes in National Insurance and income tax whereby the axe fell on the middle and high income earning people and proved to be beneficial for the poor workers. However when such type of fiscal austerity is practiced an immediate consequence is rise in unemployment. This so because the immediate effect of fiscal austerity would be loss of jobs both in the public as well as private sector. If this happens then this growing rate of unemployment will have a negative impact on the growth rate. In case of UK rate of employment has started declining from 2010 and in March 2011 the rate of unemployment was the highest compared to the past seventeen years (Bargawi & McKinley, 2011, Das, 2011). The UK government could have come up with other alternative policies such as printing money, but that too had its ill effects, such as people do not sit with such money in hand, rather they spend it, creating demand for goods and then it can lead to inflation. Without printing money the government can resort to borrowing, but that will include equal amount of less private spending, thus jobs created by stimulus spending will be equaled by jobs lost by decline in private spending. Another case is where the people can investment in government bonds when they know that taxes would go up. This will put the net effect to zero (Cochrane, 2009). UK government could have taken the path decreasing corporate and income taxes instead of increasing them. Tax increase immediately leads to more money getting accumulated, as liquidity trap, and less mobility. Tax cuts on the other hand could have increased the overall spending and helped reduce the crisis. Government spending is another component of aggregate expenditure. If the government expenditure increased then the benefits of multiplier effect could have been derived (Petroff). It has been debated whether these policies of the UK Government were appropriate in this context. Firstly, the Government declared an increase in taxes. This was expected to lower the level of production in the economy. Secondly, high taxes in an economy also have a deterring effect on the taxpayers because citizens have tried to evade taxes in economies which have imposed high levels of taxation. Thirdly, the reduction in Government spending was also supposed to lower the economic production. Fourthly, reduction in Government spending could have a detrimental effect on the consumer and the investor spending which would further decrease the level of its production. Fifth, when the Government of a country decreases its spending on higher education. It shows that the Government does not accord enough importance to the higher education of the youth and probably would not create enough ob opportunities for them in the future. The UK Government could consider reducing fiscal deficit by alternative methods: The Government could have introduced fiscal reforms in its sector. These reforms could have lowered the fiscal deficit Government could have decreased the corporate tax structure. The Government can decrease the purchases on its capital account. This would diminish the fiscal deficit. Instead of reducing its expenditure on higher education, the Government can consider other sectors to decrease its expenditure. In the agricultural sector, the Government can restrict its subsidies given to the wealthy farmers. This would help to reduce a large part of its expenses. Should the provision of higher education be expanded or contracted in the UK? The decision to finance higher education and designing policies for its betterment is crucial for any economy. Often students opt out of higher education due to the cost and as a result there arises shortages of qualitative human capital (Chattopadhyay, 2007, pp.4251-4253). Keeping in mind the deficits which the UK government is facing, one has to examine the situation in detail so as to suggest regarding the expansion or contraction in the provisions of higher education in UK. UK’s higher education system is dominated publicly funded system. As the demand for higher education is increasing it is expected that it is not possible for the taxpayer to fund the higher education system and the private sectors are keen on contributing to higher education. In UK 157 higher education institutions that have been given the power to issue their own degrees are present. However one finds that many private providers are awarding degrees in these institutions and thus involvement of the private sector is welcomed by the universities. In fact the government is opening up the higher education market so as to accommodate the involvement of the private sector (The Future of Higher Education Provision, 2011). Under the present scenario of deficits in UK budget the aim here would be to examine and suggest an expansion or contraction in UK government’s provision of higher education. Economic policies formulated for reducing such deficits includes reduction in public expenditure as a part of the structural adjustment program (The Impact of the Global Financial and Economic Crisis on the Education Sector, 2009, p.18). The UK government following the recommendations Browne’s Report had announced in 2010 that it intends to change the mode of funding higher education by transferring the cost to the person who is benefiting from it (The Spending Review, 2010). Withdrawal or reduction of government funding has its direct impact in the form of increased fees for the students. In UK the universities can charge from 2012-13 up to ?9000 from the current ?3500 from the students. Due to increased cost many economically backward students will never opt for higher education. A reduction in the funding of research will have an adverse effect too (The global impact of UK university funding cuts, 2011). Thus generation of qualitative human capital will be affected and one can find greater incidence of poverty and crime. Expansion has many advantages as it increases the number of graduate pass outs and also promotes growth. Individuals gain financially as the labor market has growing number of vacancies for graduates (BBC, 2008). Models have been constructed to justify public spending on education (Russell, n.d, pp.2 & 4. Higher education is considered to be a quasi public good as there is private benefit for those who acquire it and public in the sense that there is “positive externalities accruing to the society” (Chattopadhyay, 2007, p. 4252). An expansion in the field of higher education generates better quality of human capital. These people in turn can be the means to support various social security schemes designed to support the elders. In fact the change in the nature of jobs has to a certain extent enabled the expansion of higher education. Moreover it has been observed that the graduates earn more than non graduates (Purcell & Elias, n.d, pp. 3-4). According to the latest figure which was released by the Higher Education Statistics Agency ?19,677 is earned on an average by a graduate (What is the average graduate starting salary? 2011). Further it was pointed out by the Office for National Statistics that graduates on an average earn ?12,000 more than non graduates, i.e. ?30,000 for graduates, while ?18,000 for non graduates (Lawrence, 2011). If the educational difference becomes large then one can expect inequalities in income. It can even lead to lowering of intergenerational social mobility because we might find that children of high income earning parents having a better access to education than their peers. Moreover graduates are more likely to get jobs in the wake of a crisis as compared to non graduates. It is believed that higher education plays a major role in bringing about increment in the country’s productivity and economic growth. It even becomes the medium of wealth generation for the students. In fact, provision of higher education ensures better returns for the State (The economic benefits of a degree, 2007, p.2). Thus under such circumstances the provision of higher education in UK should be expanded. Keeping in mind all these the scenario demands for an active government role in higher education. Here one has to assess the extent to which it needs to be subsidized. Achievement of socio economic equity is considered to be another reason for public support because it would enable the economically backward people of the society to acquire the necessary skills. Apart from that it is essential for the government to ensure jobs for the graduates. Often it has been observed that people with higher education working in cafes due to lack of job opportunities. References 1. Bargawi, H. & McKinley, T. (2011). Can Drastic Deficit Reduction Help Economic Recovery? Prospects for UK, US and Southern Europe. 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