Eco2 Context1

Extract A- UK public sector investment and borrowing (£billion)

Year	Investment	Borrowing
2003	15.06	34.89
2004	16.98	37.95
2005	23.95	42.59
2006	23.79	32.17
2007	25.98	36.36
2008	38.61	69.00
2009	52.98	156.21
2010	40.12	149.21
2011	28.96	121.04

[Source: official statistics, September 2012]

Extract B

Britain’s economy has suffered a period of unimpressive growth since the depths of the recession in 2008 and 2009. In 2011, the growth in real GDP was just 0.7% and official estimates for the second quarter of 2012 show a contraction in GDP of 0.5%, a third consecutive quarterly decline. The Government blames external shocks, such as the ongoing crisis in the eurozone, and the slowdown in growth in America and China for the weak recovery of the UK economy. However, many believe that the UK Government’s austerity policy of reducing the budget deficit, by reducing government spending and increasing taxation, has meant that the recovery has been much weaker than necessary.

Many business leaders want to see more measures to stimulate growth. They tend to support the policy of cutting the budget deficit in order to reduce borrowing by the public sector, but they also argue for investment in infrastructure (such as building new roads and rail networks) to reduce costs, increase productive capacity, create jobs and improve Britain’s long-term competitiveness.
[Source: news reports, September 2012]

Extract C

The weak recovery of the UK economy has led to renewed demands for a boost to investment in the infrastructure of the UK economy. The Coalition government has responded by relaxing planning rules and by providing construction companies with a guaranteed return on their investment to try to encourage the private sector to finance large scale projects. The Government says that it hopes to encourage infrastructure investment in, for example, transport, energy supplies, housing, and faster broadband and mobile phone networks. However, it is reluctant to finance such investment in the infrastructure by increasing government spending. More government spending on infrastructure projects could mean cuts elsewhere, tax increases or more borrowing.

Investing in infrastructure can be expected to result in a multiplier process and is important for growth. It can increase real GDP by reducing unproductive journey times, improving labour mobility, providing better access to overseas markets, attracting foreign firms to set up in the UK and by increasing aggregate demand during the construction phase of the projects. However, any increase in spending might, in the short run, also lead to higher inflation and an increase in the balance of payments deficit.
[Source: news reports, September 2012]

5 mark: Define the term ‘multiplier process’

8 mark: Using Extract A, identify two significant points of comparison between public sector investment and borrowing over the period shown.

12 mark: With the help of an appropriate diagram, explain why low growth in the rest of the world is likely to affect the recovery of the UK economy.

25 mark: Using the data and your economic knowledge, assess the likely consequences of increased spending on infrastructure for the performance of the UK economy.