Impact of Government Expenditure on Growth in the UK
1.1. Background Information
United Kingdom has enjoyed high economic growth for relatively long period of time and this
growth has however been driven mainly by export-oriented manufacturing activities. However,
government spending in UK has gradually showed its effects on economic growth and
development (Perry et al., 2009). Moreover, government spending has been considered as one of
the main determinant factors of economic growth in UK. This implies that government spending
has continued to be a significant determinant of economic growth not only in UK, but also across
the world (Eaton and Eckstein, 1997; Ferguson, 2004). Economic growth theory shows that
scientific and technological progress, knowledge accumulation and well-qualified human capital
which constitute a considerable proportion of government spending are likely to continue
creating increasing returns to scale effect and finally achieve improved economic growth. For the
advanced countries, the ratio of government spending to economic growth has become larger and
larger and plays an important in stimulating growth of such countries (Silberberg and Suen,
2000).
1.2. Statement of the research problem
It is widely believed that economic growth in the United Kingdom has been influenced by
various factors. In particular, government spending has been proposed to be one of the main
factors that impact on the economic growth in UK. Therefore, the problem to be established in
this study will be to determine whether there is an impact of government expenditure on
economic growth of the UK.
Government Expenditure and Growth in the UK 3
1.3. Research questions
In order to ensure that the proposed study meets the aim and objectives of the research, the
following research questions should be answered through an investigative approach:
- What are the characteristics of government expenditure in the United Kingdom?
- What are the major indicators of economic growth in the United Kingdom?
- Is there any correlation between government expenditure and economic growth in UK?
1.4. Research objectives
The main research objective of the proposed study is to determine whether government
expenditure has any impact on economic growth in the UK.
Moreover, the research will also seek to evaluate the objectives outlined below: - To determine the characteristics of government expenditure in the United Kingdom.
- To find out the major indicators of economic growth in the United Kingdom.
- To investigate whether there is any correlation between the government expenditure and
economic growth in UK.
1.5. Significance/justification of the study
As a matter of fact, government expenditure is envisaged to have some impact on economic
growth in the UK, and this study aims at establishing the specific impact caused on UK’s
economic growth through government expenditure. This would help in enabling the formulation
of fiscal policies and regulations which are vital for the regulation and control of government
Government Expenditure and Growth in the UK 4
expenditure in a manner that make sure they are favourable for economic growth in the United
Kingdom.
- Chapter 2: Literature Review
2.1. Introduction
This chapter provides an overview of economic growth by outlining the background, principles
and concepts of economic growth. In addition, factors that determine economic growth in United
Kingdom have also been discussed.
2.2. Principles and concepts of economic growth
Economic development is referred to as the sustained, concerted actions of communities and
policymakers that lead to promotion of economic growth and the standard of living in a
particular area. It can also be referred to as the qualitative and qualitative changes in the
economy where such actions are likely to involve multiple areas such as development of critical
infrastructure, human capital, regional competitiveness, social inclusion, health, safety,
environmental sustainability, literacy, as well as other initiatives (Acemoglu, 2009). Economic
development is usually different from economic growth. This is mainly because while economic
development is an endeavour involving policy interventions with an aim of ensuring economic as
well as social well-being of people, economic growth is a market productivity phenomenon and
rise in GDP.
2.3. Economic Development and Growth
Economic development increases an economic capacity of a country towards creation of wealth
for local residents. It is also dependent on deployment of the building blocks in the country
Government Expenditure and Growth in the UK 5
including labour, facilities and equipment, land, financial capital, know-how, as well as other
physical resources, and private and public infrastructure. Economic development is crucial for a
country’s on-going growth and vitality, but development itself is different from economic growth
(Acemoglu, 2009). For instance, economic growth implies a qualitative change in what or how
goods and services are produced through shifts in resource use, production methods, workforce
skills, technology, information, or financial arrangements. An economy of a country can grow
without changing if it simply produces more of the same goods and services and in the same
manner.
In the broadest context, economic growth efforts by the public-sector cover any capacity-
building actions or investments, including, for example, roads and good schools. It is also argued
that the best public-sector approach towards economic development is usually the one that
focuses on efficiencies and investments that shape the broad economic environment for labour
and business through education, public safety, regulation, water and waste systems, the
transportation infrastructure, and the overall tax structure. However, in a narrower sense,
economic growth often refers to direct assistance for businesses and industries (Perry et al.,
2009). In this case, the public sector takes action towards reducing risks or costs for businesses
and thus encouraging business investment and productivity. However, both views, that is, the
broad and the narrow are linked to the dynamics of regional economies and potential sources of
growth. Moreover, it is also important to note that government expenditure has played a
significant role in the development and growth of the economy in the UK. This is essential for
making sure that all the stakeholders and policymakers are considered to play an appropriate role
for public sector in regional economic development.
2.4. Factors that contribute to economic growth
Government Expenditure and Growth in the UK 6
Economic growth is likely to be determined by many factors, but those that have significant
impact include: (1) Export base and import substitution: Outside sales bring foreign currency
into the region and drive other local economic activity. Foreign currencies leak out of a region
when local businesses and households buy “imports” manufactured in another country. While
useful as a theoretical concept, this simple economic concept is incomplete. This is mainly
because, if export sales and import substitution were the only sources of growth, the world
economy would not grow without export sales to other planets; (2) Productivity: An expansion of
a region’s wealth can occur in the absence of any decrease in imports or increase in exports if
productivity rises. Here, growth comes from expanding the production possibilities frontier –
what can be produced with a given level of labour, materials, and equipment; (3) Specialization
and trade: A region concentrates on producing its most efficient economic activities, earns
income from those activities, and then uses that income to import goods and services that are the
specialties of other regions; (4) Place and space: The implications of geography affect the spatial
distribution of economic activity as businesses balance access to consumer markets and
production inputs (for example, labour and materials) against costs for land and transportation;
(5) Human capital and innovation: The skills, knowledge, and ideas that people bring to the
workplace can drive productivity improvements and economic growth; (6) Financial capital:
Increased private investment – made in response to existing market demand or emerging
opportunities – creates new jobs, which increase local income, which leads to greater local
demand for goods and services, which in turn leads to more private-sector investment and
continues the cycle of growth; (7) Entrepreneurialism: Risk-taking entrepreneurs are needed to
take the ideas, labour, equipment, and materials and turn them into business activity (Acemoglu,
2009); (8) Clusters or Agglomeration: Businesses may cluster to take advantage of access to
Government Expenditure and Growth in the UK 7
buyers or inputs into the production process, including skilled workers, specialized supplier
firms, production technologies, and natural resources; (9) Product Life Cycles: Regional growth
may be affected by the “life cycle” of a product as it moves from the start-up phase to
standardized or mass, production.
Structure:
Your Research Outline encompasses the following with reference to your dissertation topic:
(i) Definition of the topic through a summary of the general focus / motivation of dissertation that
should demonstrate a coherent economics based approach to the chosen topic. The research
question(s) to be investigated should also be clearly explained in this section. [approximately 300 words]
(ii) The development of a theoretical framework literature review which should outline the key aspects
of the relevant economic theory and be fully referenced in relation to origination and application of the
theory. [approximately 1000-1500 words]
(iii) Empirical / Contextual literature review to support the specific methodology or approach to be taken
to answer your research question(s). These should be discussed in terms of a critical summary /
discussion of previous literature. NB only use academically credible studies e.g. refereed journal articles,
books, working papers, government/NGO reports etc. [approximately 1000-1500 words]
(iv) Explain the method and data to be used, which should address discuss issues such as: what methods
are appropriate to answering your research question(s)? What data / variables will you use? Where is it
from? How will you analyse it? [approximately 200 words]
Government Expenditure and Growth in the UK 8
- Chapter 3: Research Methodology
3.1. Introduction
This chapter will discuss the research methodology usually concerns the logic of a scientific or
social inquiry. Therefore, the research methodology to be discussed in this chapter outlines the
research design, data collection and the theoretical model.
3.2. Research Design
In order to ensure detailed data is collected in the context of government expenditure and
economic growth in the UK; quantitative research will be the most appropriate approach to use
for its capability to allow complex analyses and descriptions concerning the implementation
process. This is mainly achieved because quantitative research attempts to establish an
understanding of the creation of an economic phenomenon/experience and the given meaning
(Sekaran, 2000). Therefore, the focus of the researcher is usually on the nature of reality which is
constructed economically where emphasis is on the relationship between the realities and the
phenomenon under study, while at the same time taking into consideration the situational
constraints (Sapsford and Jupp, 2006).
The research method adopted in this research is a descriptive case study which will involve an
investigation of a particular empirical phenomenon within its market context where the evidence
is obtained from multiple sources. These multiple sources of evidence allow collection of varied
data which help in deepening understanding of the case under consideration and in this study
secondary research will be purely used meaning only secondary data will be gathered. This
implies that, the case study will strictly involve secondary research. This case study will make
sure that the economic phenomenon under study is explicitly discussed to establish the
Government Expenditure and Growth in the UK 9
underlying factors and the relationships that exist between different aspects of the considered
contemporary economic phenomenon. This will also make sure that explanatory data and
approach are adopted for the purpose of ensuring that all issues under investigation are fully
understood and clearly explained (Sekaran, 2000; Paltridge and Starfield, 2007).
A case study is an analysis of events, persons, policies, periods, decisions, institutions, projects,
or other systems through a holistic study using one or more methods (Swailes, 2001; Booth,
Columb and Williams, 2003). This implies that in a case study, the case that is subject of inquiry
may either be a class of phenomena providing an analytical frame or it may be an object within
which the study is carried out and which is illuminated and explicated by the case (Sapsford and
Jupp, 2006). Usually a case study is a descriptive explanatory or exploratory analysis of an
individual, group of people or event. However, the reasons why a case study research strategy
will be specifically adopted for this research is that it is an easy way of collecting both
qualitative and quantitative evidence, and it enables reliance on multiple sources of evidence, as
well as benefiting the researcher from the prior theoretical propositions’ development (Yin,
2009). Moreover, a case study strategy is always the most appropriate research method in case of
scarcity of resources such as meagre budgetary allocation and time constraint because it is
inexpensive to conduct, and this made it suitable for this research (Sekaran, 2000; Paltridge and
Starfield, 2007).
3.3. Data collection
This refers to the process of collecting data where in our case written documents shall be used
including textbooks, reports, peer reviewed journal articles as well as state websites concerning
the research topic. However, in order to analyse the reviewed source of gathered information, it
Government Expenditure and Growth in the UK 10
is fundamental to identify the context of the reviewed source of data (Booth, Columb and
Williams, 2003).
3.4. Theoretical Model
The theoretical model to be adopted in this study is the simple linear regression model which
aims to determine the relationship between the dependent variable (Government Spending) and
the independent variables such as GDP and GDP Per Capita. In this model, the dependent
variable is presumed to be in some way dependent or to be systematically predicted from the
independent variables, but the independent variables are also thought to influence dependent
variables independently. In particular, the above mentioned independent variables were chosen
mainly because they were believed to clearly reflect the growth of a country’s economy.
For example, gross domestic product (GDP) which is an indicator of a country’s total production
is one of the independent variable chosen since increasing GDP is believed to have positive
relationship with the dependent variable because it would lead to surplus production. The surplus
production then increases exports which at the same time promote importation of capital
equipment and inputs both of which improves economic growth in general, and the vice versa
holds. This means that decreasing GDP would lead to a decline in country’s economic growth.
This means that the GDP and GDP Per Capita shall be used as independent variables which will
be analysed on basis of government spending considered to be the dependent variable in this
study.
Generally, the goal of adopting simple linear regression model was to determine relationships
between the dependent and independent variables on the basis of data collected about values of
Government Expenditure and Growth in the UK 11
these variables. Simple linear regression model was mainly adopted because the study was
primarily aimed at investigating the form of the relationship that exist among the dependent
variable and the independent variables as well as the direction and strength of the relationships
which exist between the dependent variable and the independent variables through correlation
coefficients. However, quality of regression will be tested on basis of adopting other analytical
methods where correlation analysis will be heavily relied on to provide correlation statistics and
scatterplots both of which will be crucial for comparisons to be made based on regression and/or
correlation analysis.
The simple linear regression model adopted for this study compares only two variables at a time,
and it is sometimes referred to as bivariate regression. In this model the dependent variable is
usually labelled as Y and the independent variables are labelled X i… X n .
The proposed model to conduct the data analysis is represented by the equation shown below:
Simple Linear Regression: YXiii
01
Where; Yi – Dependent Variable (Government Spending)
Xi – Independent Variables (GDP and GDP Per Capita)
0 – Y-intercept
1 – Change in mean of Y when X increases by 1 (slope)
i – Random error term
The Greek letter epsilon (
i ) in the simple linear regression equation above represents the
uncertainty in the prediction of the dependent variable with the independent variable. Hence it is
Government Expenditure and Growth in the UK 12
also referred to as the error term, meaning that it is a representation of how far particular values
of y deviates from the true mean value of Y for specific x values.
Substituting the case study variables into the equation above we get the econometric form of the
equation as shown below. However, the equation below shows a binomial regression equation
which seeks to investigate the relationship between the dependent variable (Government
Spending) and the independent variables such as (GDP and GDP Per Capita).
GE = f (GDP, GDP Per Capita)
GE i =β 0 + (β 1* GDP i ) + (β 2* GDP Per Capita i ) + ε i
Where; GE is Government Spending (both recurrent and capital expenses)
GDP: Gross Domestic Product
GDPPC: Gross Domestic Product Per Capita
ε i = Random error term.
β = Parameters (β 0 = parameter at the Y-intercept)
However, a simple linear regression model is the model adopted in this study meaning the
relationship between bivariate variables only can be investigated at a time. This is also the most
effective way of testing the study hypotheses.
Moreover, various assumptions are usually made when simple linear regression model is used for
the analysis of study data. Unfortunately, the properties of the various assumptions of this model
can only be roughly tested. The assumptions made when using this model include:
Government Expenditure and Growth in the UK 13
- For any particular value of X, Y is in a normal distribution; its variance is similar for all
values of X that are possible. (Note: The X and Y parameters are those of the population) - There is a linear relationship between Y and X, meaning that the mean of Y values when
plotted against the mean of X values forms a straight line function of X. - The error term is a random variable with a zero mean in constant variance and in the
population - The values of Y are statistically independent of one another.
4.
Government Expenditure and Growth in the UK 14
Chapter 4: Research Results/Findings
4.1. Introduction
In this chapter the obtained results in the study will be presented after the process of data
collection or information gathering. This chapter will clearly present the research results in an
easily understandable manner.
4.2. Research Results
The results obtained in the research will be specifically presented in this section mainly in
tabular, graphical and analytical manner for the purpose of ensuring that varied meanings and/or
relationships are deciphered. In order to ensure that the research results are easily understood, in
this section they will be presented in a logical and orderly manner.
Government Expenditure and Growth in the UK 15
- Chapter 5: Discussion of the Research Results
5.1. Introduction
This chapter will make sure that the results of the research are discussed in details and in order to
achieve this it will be essential to ensure that a clear discussion of the research results is done
rationally.
5.2. Discussion
This section will discuss the research findings with more focus on the research results obtained
from the data collected. Therefore, the key issues identified or observed from the data analysis
are discussed in details with an emphasis on the literature review findings. This will help to
determine whether the research objectives are achieved or not. Any observed relationships or
patterns from the data analysis and their possible causes or implications will also be discussed in
this section.
Government Expenditure and Growth in the UK 16
- Chapter 6: Conclusion and Recommendations
6.1. Introduction
This chapter will discuss the research conclusion and recommendations which are likely
applicable to the research topic while more focus is emphasised on how to apply the research
findings.
6.2. Conclusion
The main findings of the research will be restated in this section while at the same time ensuring
that the key arguments are summarised. This will be followed through a statement of the
concluding remark on each finding, argument or counterargument presented for the purpose of
making sure that there is a clear understanding of the researcher’s stand point.
6.3. Recommendations
In this section the issues recommended for implementation will be highlighted with a special
reflection of how the research could have been done better. This section will also suggest future
research areas identified during the research.
Government Expenditure and Growth in the UK 17
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