Theme 2 Real World Knowledge

Question 1

Government expenditure

Answer 1

To discuss the impact of the trade cycle on government expenditure:

1. The 2008 Global Financial Crisis (Recession Phase)
- Impact on Government Expenditure:
- Governments worldwide increased spending on bailouts, stimulus packages, and unemployment benefits.
- The U.S. introduced the American Recovery and Reinvestment Act (ARRA) 2009, a $787 billion stimulus package aimed at infrastructure projects, tax cuts, and social welfare programs.
- The U.K. increased spending on welfare benefits and bank bailouts, including the nationalization of RBS and Lloyds Banking Group.

2. COVID-19 Pandemic (Recession Phase, followed by Recovery)
- Impact on Government Expenditure:
- Massive public spending to support businesses, healthcare, and households.
- The U.S. CARES Act (2020) provided $2.2 trillion in relief, including stimulus checks, unemployment benefits, and business loans.
- The U.K. furlough scheme paid 80% of workers’ wages to prevent mass unemployment.

3. Post-Pandemic Recovery (2021-2023, Recovery Phase)
- Impact on Government Expenditure:
- Shift from direct support to investment in economic recovery and infrastructure.
- The EU’s €750 billion recovery fund (“NextGenerationEU”) focused on green energy, digital transformation, and economic resilience.
- The U.S. Infrastructure Investment and Jobs Act (2021) allocated $1.2 trillion to transportation, broadband, and clean energy.

4. The 1980s Economic Boom in the U.S. (Boom Phase)
- Impact on Government Expenditure:
- Economic growth led to higher tax revenues, allowing Reaganomics to justify tax cuts while increasing military spending.
- The U.S. saw a mix of reduced welfare spending and increased defense budgets.

5. China’s Economic Boom (2000s-2010s, Boom Phase)
- Impact on Government Expenditure:
- Higher revenues from rapid GDP growth allowed China to massively invest in infrastructure (e.g., Belt and Road Initiative).
- Increased social spending on healthcare and education as the middle class expanded.