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2026 Budget

Definition: This is a quantitative financial plan that outlines projected revenues and allocated expenditures over a specific period of time.

How does it affect the UK economy?

It can influence a range of economic channels such as:
Aggregate demand which is the total spending on all finished goods and services within the economy.
Inflation and Cost of Living which is the sustained increase in the rise of the price level of all goods and services over a period of time.
Economic Growth which is the increase in the output of all goods and services produced within a specific period of time.
Public Debt which is the total amount of money or credit a government owes to its creditors as a result of past borrowing.

Key Points

  • 0% VAT rate on household electricity
  • The government has announced £100 payment for households in council tax bands A to D in England.
  • The National Living Wage will increase 3.9% from £12.71 to £13.21 per hour
  • The government has extended the existing 5p per litre fuel duty cut until July 2027
  • Banks will face a temporary increase in a corporation tax surcharge from 3% to 6%
  • The government has announced an additional £1.5bn to help deliver around 10,000 social as well as affordable homes
  • The office responsible for the budget predicts that the UK’s economic growth will rise by just 1% and inflation to be at 3.4% in 2027
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Economics 101 Week 6 – Consumption

Definition: Consumption is the spending by households on goods and services to satisfy their wants and needs.
Consumption (C) is spending that contributes to economic activity.

Examples:
– Buying food and drinks
– Purchasing clothes
– Paying for entertainment
– Buying a new car

Formula:
Consumption = Disposable Income – Savings

Example in practice:
Disposable Income = £2,000
Savings = £500
£2,000 – £500 = £1,500
Consumption = £1,500

Types of Consumption:
– Durable Goods: Products that last a long time, such as cars and televisions.
– Non-Durable Goods: Products used quickly, such as food and drinks.
– Services: Activities people pay for, such as haircuts and transport.

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Economics 101 Week 5 – Trade Balance

Definition: The trade balance is the difference between the value of a country’s exports and imports of goods over a period of time.

Exports (X) – these are goods and services made in one country and then sold to other countries.

Exports bring money into the country to boost economy (otherwise known as an injection).
Examples:
– Cars sold abroad
– Machinery exported to other countries
– Energy sold to other countries

Imports (M) – these are goods and services bought from other countries

When we import, money flows out of the country (otherwise known as a leakage).
Examples:
– Oil bought from overseas
– Food imported from another country
– Electronics purchased from abroad

Formula

Trade Balance = Value of Exports – Value of Imports = X – M

Trade Surplus

When the X > M, we call it a trade surplus. This means that the country sells more abroad than it buys

Example:
X = 600b
M = 200b

600b – 200b = 400b

Trade surplus: 400b

Trade Deficit

When the X < M, we call it a trade deficit. This means that the buys more than it sells to countries abroad

Example:
X = 1000b
M = 500b

500b – 1000b = -500b

Trade deficit: -500

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Economics 101 Week 4 – Interest Rates

Definition: Interest rates or the cost of borrowing or a reward for saving

In the United Kingdom, the Bank of England utilise the monetary policy influence interest rates and control the level of inflation. Their main objective is to keep inflation at the 2% target.

When interest rates rise:

Households:
Borrowing becomes more expensive –> Loans and mortgages become more expensive –> Decrease in consumption –> Savings increased –> Aggregate demand decreases.

Firms:
Cost of borrowing increases –> Investment decreases –> Aggregate demand decreases

Exchange rate:
The demand for the pound increases and the value of the pound appreciates. This makes having UK financial assets more attractive.

Overall:
Decrease in economic growth and an increase in cyclical unemployment.

When interest rates fall:

Households:
Borrowing becomes cheaper –> Consumption and investment increases –> Aggregate demand increases –> Increase in economic growth and potentially there may be a decrease in unemployment.

Exchange rate:
The demand for the pound decreases and the pound depreciates in value.

Overall:
Increase in economic growth and decrease in unemployment.

Evaluation Points:

Time lags – It can take a while for a change in interest rates to fully affect economy.

Consumer confidence – If consumers are worried about the economy, they may choose to save rather than spend, even when interest rates fall.

Business confidence – Lower interest rates don’t guarantee higher investment if firms are uncertain about future demand.

Elasticity – The impact depends how sensitive firms and households are to the change interest rates.

Supply-side inflation – Higher interest rates normally are more effective against demand-pull inflation than inflation caused by supply side shocks such as energy shock due to a hurricane.

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Economics 101 Week 3 – Inflation

Definition: Inflation is when the general prices of goods and services increase overtime meaning that over a prolonged period your money will buy less than it used to.

Example: If your food shopping costs £25 today but next year it costs £27.50, the prices has increased by 10%

How is inflation measured: Inflation is usually demonstrated with percentage changes based on the change in prices of goods and services using the Consumer Price Index (CPI).

How does it affect us:

When inflation rises:

  • Our food shopping cost rises
  • Fuel and energy bills can increase
  • The cost of housing may increase
  • The cost of goods and services rises
  • Money has less purchasing power.

Why does inflation occur:

Demand-Pull inflation – When people want to buy more goods and services than businesses can supply

Cost-Push inflation – When it is more expensive for businesses to produce or transport products, producers can pass the cost on to consumers thus the price rises.

Rising wages – Higher wages can increase people’s spending power but they can also increase businesses costs lowering their profit margin.

Supply problems – Shortages of raw materials, energy or products can push up prices

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Economics 101 Week 2 – Unemployment

There are many forms of unemployment and it is a major economic indicator.

Definition: a situation where a person of working age wants to work, is available to work, and is actively looking for a job but cannot find one

Why Unemployment Matters:
– Reflects Economic Health: Shows the gap between the number of people who want work and the actual jobs available.
– Influence Spending: High unemployment lowers consumer buying power, slowing down business growth
– Guides Policy: Central banks and governments track it closely to decide on interest rates and money supply rules.

Types of Unemployment:
Frictional – Temporary unemployment that occurs when workers are between jobs.
Structural – A mismatch between the skills worker possess and the skills demanded by employers.
Cyclical – Job losses caused by economic downturns or recessions. It changes with the business cycle and is driven by a drop in overall consumer and business demand.
Seasonal – Predictable job losses that occur at specific times of the year such as agricultural workers after harvest or staff at winter ski resorts

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Economics 101 Week 1 – Government Spending

Definition: The money spent by the public sector on the supply of public goods, services, and well-being of the society.
Effects of increasing government spending:

Positives:

  • Injects money into the economy – can increase output and prevent slowdown of growth
  • Job creation – Direct public sector hiring for infrastructure such as hospitals and universities reduce unemployment
  • Long-term productivity (output of goods and services) – Investing in education, research and development can increase the productive capacity of the whole economy 

Negatives:

  • Inflationary pressures – If the economy is already operating at full capacity, price level will suddenly increase drastically.
  • Crowding Out Effect – For the government to fund high spending, they often borrow heavily, which can drive up interest rates making it more expensive for private firms (businesses) to borrow and invest.
  • National Debt – Deficit-financed spending increases national debt, which can eventually lead to higher taxes or reduced public services to pay off interest.

Effects of decreasing government spending:

Positives:

  • Reduced Deficits and Debt: Lower spending shrinks the budget deficit, allowing the government to pay down national debt and avoid burdening future generations with high interest payments.
  • Lower Interest Rates: With less government borrowing, there is less demand for loanable funds, keeping borrowing costs stable for private businesses and consumers.
  • Fewer Distortions: It reduces the need for high taxation or large-scale borrowing, which can cause economic distortions or inefficiencies.
  • Lower Inflation: By taking excess demand out of the economy, reduced government spending helps to temper demand-pull inflation.

Negatives:

  • Slower Economic Growth: Government spending is a key component of GDP. Drastic cuts can lead to reduced real GDP and even trigger a recession, particularly if done during an economic downturn.
  • Increased Unemployment: Reduced public sector activity and lower demand for goods and services can lead to job losses.
  • Deteriorating Infrastructure: Chronic underspending limits investment in crucial areas like roads, public transport, and technology, lowering long-term national productivity.Poorer Public Services: 
  • Reduced funds often lead to the degradation of public goods, such as Healthcare and Education, which hurts social mobility and overall public welfare.

Government spending is a key component aggregate demand (AD) and is used to stimulate growth within the economy to increase the output of all goods and services.

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Economics 101

This week, I am announcing Economics 101 Student (E101S) – a weekly post of an overview of fundamental economic topics. This will cover the basics to avoid people getting “bogged down” in the harder less relevant details.

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Economist of The Year

Recently, I entered the young economist of the year essay competition, a competition where candidates must answer a specific question based on the following: 

  • Is a country truly wealthy if it has high GDP, but its citizens are unhappy?
  • Free trade creates winners and losers — is it desirable?
  • Should dynamic pricing be allowed for mega events like concerts/ gigs/ festivals/ sports finals?
  • Should billionaires exist in a well-functioning economy?
  • How will AI affect long run economic growth in developed countries? 

This taught me valuable skills such as analysing data from external articles, developing my own argument and coming to a judgement.

I chose to answer “How will AI affect long run economic growth in developed countries?”

Here is my submission:

How will AI affect long run economic growth in developed countries?Download

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