Macroeconomic repercussions of a fifty percent reduction in the excise duty on petrol in the

United Kingdom Macroeconomic Politic. Comsumptions. Business sector

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Discuss the macroeconomic repercussions of a fifty percent reduction in the excise duty on petrol in the United Kingdom.

To discuss the macroeconomic repercussions of a fifty percent reduction in the excise duty on petrol in the United Kingdom, I am going to structure this essay in two parts. The first one, talking about the changes in the sectors of the national economy and the second one the impact of these changes on the key economic indicators.

In the sector of the national economy, let us talking first about the households. The reduction would mean a big variation in the leakages, as the number of households in 1996 was about 24 million, what means that is the most important part in the UK economy.

In the household sector, there would be some areas that will increase and some others that will decrease. The consumption will increase (C!) because the taxation will decrease (T!), so if the taxation decrease because of the reduction in the excite duty on petrol that will mean that the households will pay less taxes to the government so this money should be use in more consumption and in also an increase in the savings (S!), but it does not mean that the income equilibrium will crash or something like that, because this increase in the consumption or savings will equal the decrease in the taxation.

Here we se how the savings and the consumption are related for the Real income per year. So if savings and the consumption increase both increase because of the reduction in the excite duty on petrol this will create an increase a situation of (deflation in a short period of time) inflation, that will be explained later on.

So the areas that will gain would be the consumption and savings. By gain the consumption that will mean more money to others sectors that are in this area, so more savings for them too, that will also mean that there will be more money in the households so the governments will increase (a little bit) their benefits by the taxes that have not being decrease.

For the sector of business, we have to differentiate two kinds of business that will be affect by the reduction. Firstly the business that are related with the petrol industry and secondly the ones that are just apart from this industry. For the business related with the industry (petrol station, transport or shops) the reduction will increase their profits but also will appear more competence in their sector because of this reduction. So will be a decrease in the resources because the petrol will be more demand and probably the cost of it will increase at the same time. Another cost that probably the government will increase to counteract the reduction in the excite duty on petrol will be the installations for petrol stations, so it will be created a new tax for it.

Finally in the changes of the sector of the national economy, let us see the impact on the government area. This area, as the reduction will affect a decrease in the money that were going to fluctuate to it, the government, the taxes in other fields such as tobacco, alcohol or any other excite duty, would have to be increase, not to create a desequilibrium in the national income.

Other repercussion should be an increase in the imports (M!) of petrol, and it would not mean an increase in the exports (X) so it will create an impact in the aggregate demand of the country.

As we have seen M will increase and X would not fluctuate that much (at least in a short period of time). We have also seen that C! and G! so the Aggregate Demand:

AD=C!+ I+G!+X- M! ” I” would not fluctuate much, that the AD will vary, the inflation grow up related with the reduction of unemployment.

Now as a second part of this essay, let us talk about the impact of the changes explained above on key economic indicators such as inflation, unemployment and economic growth.

First of all, let us define inflation. “Persistent increases in the general level of prices”(Barnok & Baxter, 1998:205). But we also know that once-added tax will immediately put up the prices but this not represent the inflation, unless the indirect effects of the VAT rise have repercussions on prices in period after the direct affect.

So as we have analysed before, the reduction in the excite duty on petrol, will increase the consumption and the savings so people would have more money and then rest of the prices will be increase in the balance way that the reduction has make the householder have more money.

So this unexpected inflation “may make it difficult for business to enter into a long term contracts” (Ison,1996:179)

In the field of unemployment, as we have seen before, if there are more consumption, it will create jobs so the unemployment rate will slow down.

Once of the inflation theories, The Philips curve, explains that “the view being that when the level of demand in the economy increased, unemployment fall”(Ison,1996:181), so that is why this inflation increase (in a long term) the labour market would have a reduction in unemployment.

Finally let us talk about the Economic growth. As we have seen, the inflation in a short time would be deflation, but in a long period of time the inflation would increase, and unemployment would go down because there have been create a lot of new jobs. So the UK growth, because of this reduction in an economic way would be satisfactory in the whole thing that we have analysed in this essay, would grow because of it, so the country will increase as we said in long period of time not in a shot time.

Then now, as a conclusion of this essay, let us say that by studying the changes in the sector of the national economy (householder, business and government) that a reduction of the fifty percent in the excite duty on petrol in a short time, the repercussions would be very badly for the UK economy, such as a deflation, unemployment and then for the economic growth.

But in this essay we have also seen, that for a conclusion (that I have get of this essay), in a long period of time the repercussions that would impact, would be good, because of the increase in consumption and savings that will create more employments, more money for the government so more economic growth and this will mean that the disinflation would change into a inflation that would be good for the UK.

BIBLIOGRPHY

  • Barnock,G.Baxter, R.& Davids,E. (1998) Dictionary of economics. Penguin.

  • Ison, Stephen. (1996). Eonomics. Pitman Publishing.

  • Porter,M. Myers,D. Wall,N. & Miller,R L. (1995) Economics explained. Collins.

2

Real disposable income per year

Real disposable income per year

Real disposable income per year

Consumption

Savings

=

+

Savings

Savings

Dissavings

Dissavings

C=Yd

AD

AD=C+I+G+X-M

Inflation

Unemployment