Answer the following questions on fiscal policy: (a) According to data from the Office of National Statistics, in January 2022 the UK public sector spent less than it received in taxes resulting in a primary surplus. Considering that the UK government was previously running a deficit, and assuming that UK GDP growth is higher than the real interest rate paid on the debt, use a phase line to show how the surplus may affect debt accumulation in the UK. (100 words excluding the graph) (b) In the Financial Times article “UK public finances vulnerable to higher inflation, says Sunak” (2 March 2022), we read: “Rishi Sunak[*] warned that the UK economy and public finances were “vulnerable” to higher inflation and interest rates in comments ahead of the spring statement suggesting that tough decisions could be required in the months ahead.” “The [Treasury] committee expressed concern that the government had contributed to the UK’s high rate of inflation which hit by 5.5 per cent in January and is expected to top 7 per cent by April. It said Sunak’s decision to increase National Insurance to bolster the health and social care sector had contributed to these inflationary pressures by fuelling high pay claims and encouraging companies to protect margins by raising prices.” [*] Note: Rishi Sunak is the UK’s Chancellor of the Exchequer, also known as Finance Minister in other countries. Explain why Sunak said that public finances are vulnerable to higher inflation, and why the announced increase in taxation (increase in national insurance) may have contributed to the inflationary pressure? Is Sunak’s announced policy a contradiction to his statement? (200 words)
Answer the following questions on fiscal policy:
(a) According to data from the Office of National Statistics, in January 2022 the UK
public sector spent less than it received in taxes resulting in a primary surplus.
Considering that the UK government was previously running a deficit, and assuming
that UK
phase line to show how the surplus may affect debt accumulation in the UK.
(100 words excluding the graph)
(b) In the Financial Times article “UK public finances vulnerable to higher inflation, says
Sunak” (2 March 2022), we read:
“Rishi Sunak[*] warned that the UK economy and public finances were “vulnerable”
to higher inflation and interest rates in comments ahead of the spring statement
suggesting that tough decisions could be required in the months ahead.”
“The [Treasury] committee expressed concern that the government had
contributed to the UK’s high rate of inflation which hit by 5.5 per cent in January
and is expected to top 7 per cent by April. It said Sunak’s decision to increase
National Insurance to bolster the health and social care sector had contributed to
these inflationary pressures by fuelling high pay claims and encouraging companies
to protect margins by raising prices.”
[*] Note: Rishi Sunak is the UK’s Chancellor of the Exchequer, also known as Finance Minister in
other countries.
Explain why Sunak said that public finances are vulnerable to higher inflation, and
why the announced increase in
contributed to the inflationary pressure? Is Sunak’s announced policy a
contradiction to his statement? (200 words)
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