Extract E refers to governments 'spending their way out of recession'.

Explain the term 'spending their way out of recession' and analyse two reasons for government spending other than to influence the economic cycle.

Extract E: The fiscal response to global economic shocks

The economic disruption of 2020 brought renewed interest among global policy-makers in expansionary fiscal measures, with governments 'spending their way out of recession'. They were anxious to prevent a permanent loss of productive capacity and the long-term scarring associated with mass unemployment. (line 1)

In the UK, as well as across the OECD, established fiscal rules were temporarily suspended to accommodate massive rescue packages. The UK’s fiscal framework, which historically aimed to reduce public debt as a share of GDP, was set aside as the deficit soared. Concerns have since risen over the sustainability of this national debt. By late 2022, debates intensified within the G7 regarding a return to fiscal consolidation, characterized by spending cuts and tax reforms to curb inflation. (line 5)

This policy tension was highlighted by the fiscal pressures in some high-debt nations. For instance, some southern European nations faced soaring borrowing costs, threatening their financial stability. In 2020, one member state's budget deficit exceeded 10% of GDP, while its public debt reached 150% of GDP, even as economic growth began to recover slightly. (line 10)

There is an ongoing debate about how fiscal policies should be coordinated internationally. Some economists argue for a centralized fiscal authority within trade blocs to enforce spending rules. Others argue that sovereign governments must retain full fiscal autonomy to address domestic priorities. (line 15)