Question

The New Zealand Government’s $50 billion Covid-19 Recovery Budget has been described as the “biggest spending package in history” (by the New Zealand Herald). Explain, with reference to the determinants of productivity, what impact each of the following policies will have on Economic Growth:

i. “Shovel-ready” projects: $3 billion has been allocated to infrastructure projects such as waterways, transport, clean energy and buildings.

ii. Free tertiary training: $1.6 billion has been allocated to provide free tertiary training courses in building, agriculture and manufacturing.

iii. School lunch program: $220 million has been allocated to expand the free school lunch program to ensure more school children who may be experiencing food insecurity are fed during school hours.

word count - 500 words max

Answer 1

Fiscal policy is a policy controlled by the government and it has two tools: taxes and govt. spending. During recessions govt. decreases taxes and increases govt. spending which is called expansionary fiscal policy. During inflation govt. increases taxes and decreases govt. spending which is called contractionary fiscal policy.

In this case, New zealand is following expansionary fiscal policy through stimulus spendings. This will also bring crowding out effect as a side effect. As government is spending more money, interest rates will go up and this dicourages private and business spendings.

i. This is input in both aggregate deamnd and aggregate supply side, this will ensure positive growth as initial shift in aggregate demand to right from AD1 tO AD2 is complemented by shift in Aggregate supply from AS1 to AS2 and hence long run aggregate supply will also be more which will ensure more growth in UK economy. Refer. fig below. Equilibrium shifts from a to b and then to c in the medium to long run.

ii. This will shift aggregate supply to right from AS1 to AS2. This focuses mainly on human capital so skilled people will raise productivity. It will also create more jobs in the market.

iii.This also is a supply side policy which is an interventionist based supply side policy aimed at shifting aggregate supply to the right in the long run.

It should be noted that all these policies will also help shifting aggregate demand to right and will help to overcome slowdown in an economy.